Saturday, February 24, 2018

Futures File: New Fed chair, same interest rate outlook

By Walt Breitinger and Alex Breitinger
Feb. 3, 2018 at 11 p.m.

Federal Reserve Board Chair Janet Yellen stepped down Friday, to be replaced Monday by Jerome Powell, who has served on the Fed's Board of Governors since 2012.

He will take over a Fed that has raised interest rates three times in the past year. The Fed projects it will continue raising rates to more normal levels after almost a decade at near-zero rates.

For consumers, this will mean higher returns on savings accounts and other interest-bearing investments. But it also will mean higher borrowing costs, which could limit consumers' ability to buy new cars, homes or other goods. For this reason, higher rates can prevent inflation but also create a drag on the economy.

On Friday morning, government data suggested the economy is doing fine on its own after a report showed strong job growth, rising wages and new people joining the workforce.

The news knocked 10-year U.S. Treasury Note futures to a six-year low. The futures markets move opposite of interest rates, signaling the markets' expectations for a continuation of rising rates.

Natural gas volatile

Natural gas exploded to a one-year high early last week as forecasts for an Arctic blast this month spooked the markets. That was especially concerning because current stockpiles of the fuel are nearly 20 percent lower than usual at this time of year, creating a tight supply that pushed prices to more than $3.60 per million British thermal units Monday.

Just a few days later, after updated forecasts projected less severe cold weather, the market bubble popped and plunged, dropping over 30 cents, capping off a wild week that reminded investors that wild weather markets can create immense risk and opportunities.

Wheat market rises

Wheat prices shot higher this past week as concerns mounted about dry conditions in the southern Great Plains. The hard red winter wheat crop in Kansas, Oklahoma, and Texas was in increasingly dire straits, with only 14 percent in good or excellent condition, according to a recent USDA report.

That caused Kansas City wheat futures to rise to more than $4.70 per bushel for the first time since August, and led to the highest one-day trading volume in history for the contract.

While the poor conditions are concerning many farmers, others have been gleefully using the futures markets to capture the now-high prices. They expect that the crop will come out just fine, dismissing worriers with a common adage that stresses wheat's resilience: "wheat is a weed."

— Walt and Alex Breitinger are commodity futures brokers with Paragon Investments in Silver Lake, Kansas. This is not a solicitation of any order to buy or sell any market.



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