Interest Rates Headed Down as Fed Confronts Global Slowdown

U.S. Federal Reserve (Fed) under the leadership of Chairman Jerome H. Powell. after the U.S. Federal Reserve’s latest Federal Open Market Committee (FOMC) meeting on March 19-20, 2019 signaled:

First, their intent to move from a primary directional monetary policy tightening focus through fed funds rate increases, unwinding their balance sheet, and other programs; to: Second, the Fed just signaled a proactive willingness to move to a highly unconventional accommodative set of increasingly aggressive monetary policy actions through, if required: (A) Low, zero, or negative interest rates; (B) A more direct extreme debt monetizing program; (C) Helicopter money or simply money printing and distributing the newly printed currency to the public with the objective of direct and immediate stimulus for the U.S. economy; and, (D) Other highly unconventional creative stimulative and productivity focused ideas. Each of these monetary policy actions will likely have to be implemented over time when deemed necessary.

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Why the Fed course change? The global slowdown that emerged in the second half of 2018 remains dangerously problematic, placing an increasing drag on global growth, increasing market uncertainty and elevating market participant anxiety. This is due to several factors, but the ongoing simmering global trade and broader policy disputes, especially with China, the European Union, etc., are raising concerns the current global slowdown may become chronic, persist for an extended period and further destabilize global economic activity.

Left unchecked the ongoing global slowdown would likely:

• Fan the flames of social discontent in countries around the world and breed new energized life into the global populist movements;
• Create increasing political instability in country after country around the world, and
• At the very least, this likely leads to dangerously unstable global economic activity.

Therefore, the U.S. Federal Reserve (Fed) is signaling that they remain data dependent and are going to patiently monitor U.S. and global economic activity region by region and country by country as they move from an emphasis on tightening, by increasing the fed fund rate, balance sheet reduction, etc., to an increasing emphasis on implementing possibly extraordinary new levels of modern monetary policy actions of accommodation that have been previously considered off limits, economically reckless and/or politically incorrect.

Bottom Line

The Fed has pivoted from a priority on tightening monetary policy to a priority on accommodation due to the building chronic nature of the global slowdown. Good, bad, right or wrong, the U.S. is entering a fascinating new era of engineered economic expansion, which near term will appear to defy economic gravity that will have huge social, political, and economic implications.

How will markets be affected?

10-Year U.S. Treasury Yield: Sideways to down..Presently, it is hard to see what keeps the 10-year U.S. Treasury Yield from revisiting the July 2016 low of 1.43. The November 2018 high was 3.24 and presently the yield or interest rate is at 2.41. With global investors fixated on global slowdown uncertainties, the demand will remain high for short duration safe-haven U.S. sovereign or government debt in the near term; therefore, 10-Year Treasury Yields should remain sideways with a downside bias, Charts A1 to A4.

U.S. Dollar Index: Sideways remaining in its multi-month range of 95.03 to 98.25, the dollar is currently at 96.8. This maybe the best near-term expectation. If the dollar breaks out to the upside, the U.S. policymakers will likely intervene in a serious way. A neutral to lower dollar should be supportive of current U.S. economic activity and global economies in general. This is one key factor limiting the likelihood of a U.S. recession in 2019, Charts A5 to A8.

With global deflationary forces remaining highly problematic, with most of the world’s commodities having a supply surplus, and with the ongoing global realignment of the world’s currency, bond, equity, and commodity markets there are strong limitations to this index upside. Solving U.S., China and ongoing global trade and other policy disputes will remain a multiyear journey. Near term and ongoing maintenance of U.S. and global economic momentum will remain supportive of range bound commodity prices until supply is curtailed due to increased demand or a supply disruption event or events, Charts B1 to B5.

$WTIC Light Crude Oil: Near term light crude oil remains bullish as it finishes a topping process potentially in the $64.54 per barrel area, March 29, 2019 close $60.14 per barrel.

Fundamentals and political intervention should return this market to a bearish state. The potential price range presently is ($48.95 to $64.54 per barrel). This is a complex market that seems to baffle most analysts. Charts B6 to B9.

Soybeans: Near term, soybeans remain in a sideways trading range with a downside bias. The potential trading range is $7.95 to $9.39 per bushel, March 29, 2019 close $8.84 per bushel. Charts B10 to B13.

Corn: Near term, corn remains in a sideways trading range with a downside bias. The potential trading range is $3.05 to $3.78 per bushel, March 29, 2019 close $3.57 per bushel, Charts B14 to B17.

Long Grain Rice: USDA’s March 29, 2019 prospective planting report was friendlier than I expected, but was it friendly enough? Until proven otherwise: My primary trading range is $10.81 to $11.35 per cwt. or $4.87 to $5.11 per bushel; if support does not hold, my secondary range is $10.14 to 11.14 per cwt. or $4.56 to $5.01 per bushel, March 29, 2019 close $10.85 per cwt. or $4.88 per bushel, Charts B18 to B20. I will do a separate article and slide show on 2019 acreage intentions.

Wheat: Wheat appears to be displaying a trading range between $4.28 and $4.76 per bushel, March 29, 2019 close $4.57 per bushel. We will adjust our estimates as market dynamics unfold, Charts B25 to B28.