As the Fed remains ambivalent about its next moves, it is actually the commodity markets that might provide an answer as to when the next interest rate hike will happen. Their action in the next few days might dictate if the world economy will shift to the next growth phase or if it will eventually turn negative again. Copper (NYSEARCA:JJC), aluminum (NYSEARCA:JJU), and crude oil (NYSEARCA:USO) are testing very important technical limits, which if broken or sustained will reveal new and decisive trends. If these signals from commodities align with the outcome of this week's macro releases, then investors will get a clear sense of the US dynamics and the global business cycle for the rest of the year and beyond.
While the uptrend of the Baltic Dry Index, which indicates the shipping costs of dry raw materials like iron ore and grain, remains intact, the most important commodities have come at a crossroads. Even though this index is signaling optimism for the global economy, copper, one of the most important pro-growth commodity indicators, does not share the same hopefulness. In fact, its recent correction, has forced it to test its major support line (line A). If copper eventually breaks this support line to the downside it could herald a new and strong downward trend. This trend could drag its price down towards the $1.65/pound level and signal serious trouble for the global economy.
Aluminum is also correcting and it too is approaching its major support line for this year (trendline A). If it manages to stop there then it is highly likely that it will rebound in the coming months. If however, it takes a deeper dive and ends up breaking this support line then we are looking at an aluminum reversal which could bring its price down to the lows of 2015. Light crude oil rests at an equally critical position, since it is testing the neckline resistance of its 14-month-long head and shoulders formation. If oil manages to surpass that level it will signal a bullish move towards a target of $75 per barrel. Such a sizable move would definitely increase the chances of one or more rate hikes along the way. For this particular reason the release of crude inventories this week are very important because they might act as a catalyst to oil's next big move.
US Economy Watch
The long recovery cycle of the US economy has troubled Fed officials for long and it still poses big dilemmas for them. The release of US services and manufacturing PMIs, this week, might shed some light on the direction of the business cycle in Q4, especially if these indices manage to surprise investors to the upside. On the housing front, new home sales are expected to cool down a bit, possibly returning to the 600K annualized pace or less, a figure that is not alarming since it cannot reverse the steady recovery trend of the last five years or so. The outcome of the durable goods orders for September, coupled with the headline GDP rate for Q3, and the personal consumption expenditure, will provide a clear picture of how the US business cycle unfolds. Chances are, though, that these figures will confirm the continuation of the slow-growth pace, which is the base case scenario priced in by asset markets. A view on the consumer sentiment for October will also be released and the latest weekly initial jobless claims will give investors some hints about the upcoming Q4 dynamics.
Global Economic Watch
While the direction of the US business cycle is by far the most important factor that Fed takes into account when deciding on its monetary policy actions, it cannot overlook the dynamics of the global economy. This is especially true given the accumulation of systemic risks in various parts of the world, which if materialized could bring down the US economy with them. For these reasons it is vital for investors to carefully watch a series of macro releases for the Eurozone, the UK, and Japan, scheduled to be published this week, which can certainly impact the long-end of the US bond market (NYSEARCA:TLT).
Last week the ECB didn't provide guidance regarding its next policy action. This is probably due to the fact that it continues to receive inconclusive signals from Europe at a time when the European economies are facing the threat of stagnation. Having said that, the manufacturing and services PMIs for the Eurozone as well as for Germany, which will be published later this week, might provide some clear signals on the short-term dynamics. The degree of divergence between the core of the Euro area and its periphery will be high on the investor agenda, as it will give them a better idea of the relative macro trends at play. The German consumer and business climate indicators for November will show if the British FX crisis has produced reverberations to the biggest economy of the region. The release of German CPI for October will be extremely important, especially if it proves to be stronger than expected, as this will increase the probabilities of an extension of QE by the ECB.
The UK economy has recently started to witness a balance of payments crisis with global investors dumping the Gilts and the pound at the same time. In such a critical state, the Q3 growth rate release will most probably have an asymmetric effect on asset markets. Even if the headline number manages to surpass the projected 2.1% rate, it still won't be able to sustain a positive impact for a long time. Its situation is so dire at the moment that any positive impact will be extremely short. If on the other hand this week's release reveals a negative surprise then the pound will plummet, paving the way for parity with the US dollar.
In Asia, this week, investors will receive critical macro news from the Japanese economy, which continues to battle a deflationary cycle. The CPI for September is expected to come at -0.5% on a YoY basis while the drop in household spending is expected to be smaller than that of the month before.
This week's global macro releases become more important because they coincide with the commodity market testing its levels. The long and painful recovery cycle of the global economy cannot be drenched in such instability any longer. It will either turn to a stronger growth phase or it will slip to an outright recession. Investors will definitely get a more clear view of the ultimate outcome in the following days, wherein commodities will act as their crystal ball.
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