The Fed, The Dollar, Agriculture, And Commodities

The market is at an interesting inflection point. Wednesday gives us a the ADP Employment report, the GDP report, and a Fed rate decision. In the mean time, there is a move into tech from dollar related equities and commodities, such as the agriculture plays, energy plays, and large cap internationals (that may see a wash for any Fed cut - dollar move). Finance and market geeks love this kind of stuff, even though the hours and even days before can get kind of boring as the market waits for the Fed news. Given that GDP and an employment report are also coming out beforehand, and that the market has been doing some sector rotation in advance of the Fed decision, things have at least been a little more interesting, and somewhat of a preview of what is to come.

Up first will be the ADP Employment number, which while sometimes predictive of the Friday jobs number, has also been a somewhat unreliable indicator. The market is expecting a -60,000 loss.

Next will be the advanced GDP report for Q1. The market is expecting a 0.5% value for GDP. Given that is number can be "inflated" a little, it will be important to dig into the details. Since recessions are defined by two negative quarters of GDP, there is certainly interest in having a positive GDP, even if small. It is not that the number will be faked, but high inventories in particular can cause the number to look better than it actually is. High inventories affect the calculation by raising the number, but as any business knows, excess inventories is not usually good. Not only do they cost more to insure and store, but just because an inventory item is complete and ready to sell does not mean it will translate to accounts receivable anytime soon while it sits on the shelf. Economist, and the market, will be watching the inventory levels.

Later in the afternoon we will get the Federal Reserve decision. The Fed Fund Futures are pricing in a near certain chance the Fed will cut by 25 bps. Anything more would certainly not send a good signal. No cut, and probably even a 25 bp cut with a tightening bias would be bullish for the dollar, and subsequently negative for those stocks and commodities that have benefited from the lower dollar - such as agriculture plays, energy plays, and large-cap industrials with large international exposure.

Of additional interest in the Fed announcement will be the number of dissenting votes, if any. The money market futures are already pricing in rate hikes next year, so chances are there may be some dissent if we get a cut, as with the last few meetings. What may bring everyone to the table in agreement is a change in bias - allowing the Fed to further highlight that the tide has changed.

As already mention, the market is anticipating an end to the rate easing cycle. Combined with the recent Barron's article discussing how the dollar may have finally hit bottom, traders have already begun to cycle out of commodities, which have run-up considerably since the beginning of the year, and into select technology stocks that have recently reported good earnings and/or have given good guidance.

Put options on the USO crude oil ETF have also been increasing, with 2/3rds on the short side, while the DUG Ultrashort oil ETF has seen triple normal volume. While a long shot, recent chatter in Washington about the problems caused by Ethanol could cause the bottom to fall out further for the soft ag commodities, although that may be expecting too much in an election year. Commodity related stocks, such as Deere have sold off, while the fertilizer companies, such as Mosaic, Potash, and Agrium are also correcting after recent parabolic moves. Nonetheless, downward moves might be short lived if demand for grains continue to increase, regardless of Fed decisions and dollar moves. Crude oil and natural gas will also see demand and supply pressures, with crude seeing some of the dollar premium taken out as the Fed begins to tighten, or imply an end to easing. Of course contrarians may be smiling, given how the increased short positions in oil could go badly for the longs if the market does not get what it wants.

Only time will tell. It should be an interesting summer, regardless.

Tickers: AGU, POT, MOS, DUG, USO, DE