Like sticking a pin in a balloon, the wind was taken out of the market last week as poor economic news brought out the bears. The once resilient consumer appears to be changing spending habits in the face of higher prices and the ever-looming threat of a recession. Bearish traders saw this as a precursor to a decline in cotton demand. After trading above a dollar for six consecutive weeks, cotton closed Friday at 99.29 on limit down action.
It all began with the monthly supply and demand report. In a manner typical of USDA, they reversed course by increasing U.S. production by 1.2 million bales just a month after reducing it by three million. Did your crop get bigger over the last month? With world consumption projected to decline by half a million bales, the all-important ending stocks is estimated to grow by two million bales.
Despite the current Administration telling us the economy is on the mend, numbers do not lie. Consumer prices were up 8.3 percent in August from a year earlier. In more simple terms, the American household is paying $426 more a month than a year ago for the same basket of goods and services.
Down only slightly from last month’s 8.5 percent, its apparent runaway inflation is not being reined in. Threatening to raise interest rates until it hurts, if necessary, we can expect the Fed to institute another sizeable rate hike at their meeting on Wednesday.
Though retail sales unexpectedly rebounded in August by 0.3 percent, such is misleading. These sales numbers are not adjusted for inflation thus the increase could be more the result of higher prices. It certainly was not the back-to-school bump normally seen. It shows consumers are still spending but cutting back on discretionary items with medium to lower income families feeling the most constrained.
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As we have said before, cotton is influenced by the economic environment more so than any other commodity. Thus, it often moves in sync with equity markets. Therefore, it is safe to say some of cotton’s five and half cent drop in price last week was driven by a meltdown in the stock market. The Dow Jones fell 1,337 points last week for a loss of over four percent.
This was brought about by continued high inflation numbers as well as a startling earnings forecast by a major U.S. carrier. FedEx, often seen as an economic bellwether, warned that a slowing world economy, especially in Asia and Europe, will cause it to fall 500 million dollars short of its target revenue; therefore, giving us possible early signs of a global recession.
Where to from here? Upon Friday’s close the next support is 96.50, the 60 percent Fibonacci retracement level. A break of this brings the previous low of 82 cents into play.
Keep in mind, though world production was raised, cotton fundamentals remain sound with ending stocks at very manageable levels, a fact borne out by merchants still wanting and buying cotton. So, absent any macroeconomic pressures, cotton prices should climb back over a dollar. However, those headwinds will be formidable.