Commodity Insite

Listening to a market analyst based in New York earlier this week I heard him refer to the stock market as having, “attention deficit disorder.” I don’t disagree but the same description can be equally applied to the commodity markets as well. One description of attention deficit disorder is, “A chronic condition including attention difficulty, hyperactivity, and impulsiveness.”

The chief investment office at Greenwood Capital Associates was recently quoted as stating, “the markets...can’t figure out what they want. There is a lot of emotional reaction going on.” Those statements were intended for the stock and bond markets because both dropped 10 percent in the final week of January and first week of February. However, commodities as measured by the CRB Index also dropped 10 percent during that time frame.

One reason for the sharp decline with stocks, bonds and commodities is the fear the Fed will continue to hike interest rates to slow the economy and keep inflationary pressures in check. Reinforcing those fears and justifying the 10 percent break that shook the bulls to their very core was this week’s Consumer Price Index report that showed for the first time in nine years, inflationary pressures are above expectations.

According to Bloomberg News, U.S consumer prices rose 0.5 percent from the previous month, above expectations. The so-called core gauge that excludes volatile good and energy costs rose 0.3 percent, also above expectation. And, year over year, the percentage rise with inflation was, above expectations.

When the CPI report hit the wires, the yields on 10-year Treasuries rose to 2.86 percent, a four-year high, which was the normal reaction from the marketplace. For the first time in nine years, based on the CPI report, inflationary pressures are rearing their ugly head which nearly guarantees the Fed will continue to hike rates.

Historically, higher rates is bullish the dollar. But immediately following the CPI report, the dollar did a nose dive, falling to its lowest point in over two years. Also, based on history, as the dollar declines in value, inflationary pressures tend to rise. Thus, with the Fed hiking rates and a CPI report screaming inflation is here, the dollar moved south and defied history.

If there was ever a classic example of “attention deficit disorder” plaguing a market, it would be the dollar and how it is now reacting to higher interest rates and solid economic data regarding the economy. But the problem facing the greenback are the massive budget deficits on the horizon and the “jawboning,” the "bad mouthing” of the dollar coming from the White House.

Bloomberg News said it best a few days ago. “Congress’s bipartisan vote last week to increase spending by nearly $300 billion over the next two years comes on the heels of a $1.5 trillion tax cut that could boost domestic demand and the country’s trade gap. Strategists are taking heed, zeroing in on America’s twin deficits as a likely catalyst of continued greenback weakness following February’s brief respite.”

No doubt, there is another big battle underway in the financial markets. The Fed is hiking rates to keep inflationary pressures in check which, based on history, has always supported the dollar. But the budget deficits and bad mouthing the dollar tends to cause inflationary pressures. Who, you ask, will likely win the battle?

From, thebalance.com come the following comments. “What, "don't fight the Fed" means is that, based on historical averages, investors can do well to invest in a way that aligns with current monetary policies of the Federal Reserve Board, rather than against them.”

And, thebalance.com goes on to state clearly, “the saying suggests an investor should stay fully invested when the Fed is lowering interest rates or keeping them low. When the Fed starts to raise rates, it does so to prevent the economy from overheating, which could then fuel higher rates of inflation. Rising rates also coincides with the late phase of the business cycle, which immediately precedes a bear market.”

Moving forward, it comes down to expectations. If inflationary pressure exceeds expectations, the Fed will hike rates, which is bearish most markets. If the Fed hikes rates faster than expectations, it is bearish most markets.

I will not fight the Fed as they tend to get what they want. In my view, the Fed wants one thing and the market bulls want another. It is no wonder some believe the markets are in throes of attention deficit disorder.