What Traders are Talking About:
* Fed continues asset purchases; interest rates now tied to unemployment, inflation. At the conclusion of the two-day Federal Open Market Committee meeting on Wednesday, the Fed committed to monthly purchases of $45 billion in Treasuries in addition the $40 billion per month in mortgage-backed securities it started buying in September. Also, in an unprecedented move, the Fed is now tying short-term interest rates to employment and inflation. As long as the unemployment rate remains above 6.5% and the long-term inflation forecast is below 2.5%, the Fed will leave the federal funds rate at 0% to 0.25%. The continuation of a bond-buying program was expected, but the economic parameters for determining short-term interest rates is a new twist.
The long and short of it: Market reaction to the Fed moves was muted, suggesting there was nothing that caught investors by surprise. That's a good thing in that the Fed moves remain underlying support for markets. But it's concerning that additional quantitative easing is failing to spark investor confidence. The further the U.S. economy moves down its current path, the more investors expect from the Fed. Unfortunately, the Fed's ability to support the U.S. economy is limited.
* Fed action bullish for commodities. While market reaction was relatively muted Wednesday, the Fed's quantitative easing moves are bullish for commodities -- longer-term. The aggressive printing of money will eventually lead to an inflationary environment as more money is available to purchase goods. But inflation will not take off until monetary velocity picks up and it's currently very low.
The long and short of it: With the Fed keeping the printing presses rolling, monetary velocity remains the key to watch. If the vast money supply starts to get some traction, inflation will rise (quickly) and the Fed will have to start raising interest rates. But that's on the distant horizon at this point.
* South Korea actively buying. The flurry of end-user buying since USDA's reports Tuesday continues, with South Korea being the move active participant -- by far. In the past two days, South Korean firms have purchased 307,000 MT of corn (238,000 MT South American and South African, 69,000 MT of U.S. or South American), 305,000 MT of soybeans (185,000 MT of U.S. non-GMO, 10,000 MT of non-GMO other than U.S. origin and 110,000 MT of Brazilian) and 24,100 MT of U.S. wheat. South Korean firms also have tenders out for up to 140,000 MT of optional-origin corn and 24,000 MT of U.S. wheat. There was also talk in the market Wednesday that China was shopping for five to eight cargoes of soybeans.
The long and short of it: The pickup in end-user buying signals they need supplies and see value in current price levels. It's somewhat of a surprise the sharp drop in wheat price this week has not triggered more export activity.
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