Distillate Futures See Big Outflow of Speculative Money

Commodity

Energy

Summary:

Portfolio investors have continued to realise profits on formerly bullish diesel positions and begun to turn bearish as supplies adjust...

Portfolio investors have continued to realise profits on formerly bullish diesel positions and begun to turn bearish as supplies adjust to the disruption of trade through the Red Sea and a mixed industrial outlook.

Hedge funds and other money managers sold the equivalent of 26 million barrels in the six most important petroleum-related futures and options contracts over the seven days ending on March 26.

Sales came after fund managers purchased 140 million barrels the week before, one of the largest increases in the last decade, according to position reports filed with exchanges and regulators.

But nearly all the latest week’s sales were in middle distillates (-24 million barrels), both U.S. diesel (-8 million) and European gas oil (-17 million).

There were only minor adjustments elsewhere in NYMEX and ICE WTI (-5 million barrels), Brent (+1 million) and U.S. gasoline (+3 million).

As a result, the combined distillates position was reduced to 49 million barrels (43rd percentile for all weeks since 2013), down from a recent peak of 87 million (72nd percentile) on Feb. 13.

The reduction in distillate positions has coincided with a significant softening of gas oil and diesel prices compared with crude oil.

The premium for European gas oil over Brent crude had shrunk to roughly $168 per tonne on March 26, down from a recent peak of $274 on Feb. 9.

The premium for U.S. ultra-low sulphur diesel over U.S. crude had fallen to $28 per barrel from $48 over the same period.

Despite attacks on tankers in the Red Sea and Gulf of Aden that forced the re-routing of diesel trade there has been no discernible tightening of supplies.

U.S. diesel inventories were about 14 million barrels (-10% or -0.86 standard deviations) below the prior ten-year seasonal average on March 22.

But the deficit has not worsened significantly from 11 million barrels (-8% or -0.76 standard deviations) at the start of 2024.

The market has adjusted to the longer routes for diesel deliveries and the impact of Ukraine’s drone attacks on Russia’s refineries.

In the meantime, the outlook for a cyclical industrial recovery in the major economies to boost diesel consumption and prices has remained mixed.

Global freight flows appear to be strengthening after a long but shallow downturn between the middle of 2022 and the middle of 2023.

Manufacturing in the United States and China also shows signs of increasing, but Europe’s industrial businesses have struggled to emerge decisively from recession.

Persistent inflation in the services sector has forced central banks to postpone anticipated interest rate cuts until the middle of the year or later.

In consequence, the expected tightening of distillate inventories has been pushed back and caused many fund managers to be more cautious in the short term.

U.S. Natural Gas

Investors made few changes to gas positions for the third week running, after an earlier buying surge in late February and the start of March occasioned by the announcement of production and drilling cuts fizzled out.

Hedge funds and other money managers had reduced their net short position to 431 billion cubic feet (bcf) (20th percentile for all weeks since 2010) on March 26 from 1,675 bcf (3rd percentile) on Feb. 20.

In real terms, prices remain only a little above the multi-decade lows hit in mid-February. Announced drilling and output cuts should put a floor beneath them and the balance of risks is tilted to the upside in the medium term.

But working gas stocks were still 656 bcf (+40% or +1.44 standard deviations) above the prior ten-year seasonal average on March 22 and it will take time erode the bloated inventories.

Source: Devdiscourse

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Remarks of Officials

Cleveland Fed President Loretta J. Mester said on April 2 as follows.

The Fed has made substantial progress on inflation, but inflation is still above the 2% target. The monthly inflation readings in January and February came in firmer than the readings over the second half of last year and are a good reminder that the disinflation process will be "bumpy".

The inflation picture hasn't changed much so far this year, and I continue to believe that inflation will keep declining over time to 2%, but more data are needed to boost our confidence and give us a better sense of whether the disinflation process is stalling out. The Fed is not expected to gain enough confidence at the next FOMC meeting to decide on a rate cut.

If the economy develops in line with expectations, it would be appropriate for the Fed to start cutting rates later in the year. The actual path of policy will depend on how the economy develops.

Economic growth is expected to slow somewhat this year compared with last year, but it will remain above the trend growth of 2%; the labor market is expected to come into better balance this year, with the unemployment rate rising modestly from its current very low level; and further progress on disinflation is expected to be made but at a slower pace than last year.

The bigger risk would be to begin reducing the funds rate too early. And with labor markets and economic growth both being very solid, we do not need to take that risk. Our current monetary policy stance puts us in a good position to manage risks that could manifest themselves on either side. If the labor market deteriorates, the Fed can move rates down quickly. If inflation appears to be stalling, the Fed can hold its restrictive stance for longer.

Mester's Speech

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Cohen

Economic

Central Bank

The U.S. Federal Reserve held its benchmark overnight interest rate steady in the 5.25%-5.50% range at its March 19-20 policy meeting, and officials continued to anticipate approving three quarter-percentage-point rate cuts by the end of 2024.

Before policymakers begin to ease borrowing costs, they say they want to see more data confirming that inflation is returning to the U.S. central bank's 2% target.

Here's a recap of recent key data watched by the central bank:

Job Openings (Released April 2, next release May 1)

Fed Chair Jerome Powell keeps a close eye on the U.S. Labor Department's Job Openings and Labor Turnover Survey (JOLTS) for information on the imbalance between labor supply and demand, and particularly on the number of job openings available to each person who is without a job but looking for one. The ratio had been falling steadily towards its pre-pandemic level, but since October has remained in the 1.35-1.43 range, higher than the 1.2-to-1 level seen before the health crisis.

The number fell in the most recent release, for February, as the number of people seeking work rose, pushing up the unemployment rate.

Other aspects of the survey, like the quits rate, have edged back to pre-pandemic levels. Charting the Fed's Economic Data Flow_1

Inflation (PCE released March 29; next release CPI on April 10)

The personal consumption expenditures (PCE) price index, which the Fed uses to set its 2% inflation target, increased at a 2.5% annual rate in February, up from the 2.4% rate seen in January. Core inflation stripped of volatile food and energy prices rose 2.8%, a slight decline from the upwardly revised 2.9% in January. Neither number is likely to boost confidence among Fed policymakers that inflation will steadily return to their target.

The CPI had risen 3.2% on a year-on-year basis in February, up from 3.1% in the prior month, and higher than analysts expected. The core rate excluding food and energy costs, meanwhile, only edged down to 3.8% from 3.9%, another reminder that the Fed's inflation battle may last longer than anticipated. Rising gasoline and shelter costs contributed the bulk of the CPI increase. Whether the Fed's hoped-for consistent easing in housing costs is imminent remains uncertain. Charting the Fed's Economic Data Flow_2

Employment (Released March 8; next release April 5)

U.S. firms added a larger-than-expected 275,000 jobs in February, though employment gains in the previous two months were revised lower by 167,000. The unemployment rate rose to a two-year high of 3.9% as a rise in the size of the workforce was outweighed by a larger increase in the number of people reporting they were out of work.

Fed officials have become more comfortable with the idea that continued strong job growth could still allow inflation to fall, especially if the supply of labor continues to grow and wage growth eases.

On the wage front, growth eased on a month-to-month basis to just 0.1%, the smallest increase in two years and essentially neutralizing the unexpectedly strong jump in hourly pay in the prior month.

The annual increase, meanwhile, slowed to 4.3% from 4.4%. While marking further progress, that level is still well above the 3.0%-3.5% range that most policymakers view as consistent with the Fed's 2% inflation target.

Source: Reuters

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Alex

Economic

Forex

The Japanese Yen (JPY) edges higher against its American counterpart during the Asian session on Wednesday, albeit it lacks follow-through and remains confined in a familiar range held over the past two weeks or so. Investors remain on alert amid the possibility of intervention by Japanese authorities to prevent a destabilizing fall in the domestic currency. This, along with a generally weaker sentiment around the equity markets, turns out to be a key factor lending some support to the safe-haven JPY.

The US Dollar (USD), on the other hand, is seen consolidating the previous day's retracement slide from a five-month top and contributes to the mildly offered tone surrounding the USD/JPY pair. Any meaningful appreciating move for the JPY, however, seems elusive in the wake of the Bank of Japan's (BoJ) dovish language, signaling that the next rate hike will be some time away. In contrast, the markets continue trimming their bets that the Federal Reserve (Fed) will cut interest rates in June.

Expectations that the gap between US and Japanese interest rates will stay wide might further hold back the JPY bulls from placing aggressive bets, which, in turn, should help limit the downside for the USD/JPY pair. Investors now look to the US economic docket – featuring the release of the ADP report on private-sector employment and ISM Services PMI. This, along with speeches by influential FOMC members, including the Fed Chair Jerome Powell, should provide a fresh impetus later today.

Daily Digest Market Movers: Japanese Yen lacks firm near-term direction amid mixed fundamental cues

Japanese Finance Minister Shunichi Suzuki repeated his warning that authorities were ready to take appropriate action against excessive exchange-rate volatility and offered some support to the Japanese Yen.

The uncertainty over the Federal Reserve’s plans to cut interest rates, along with persistent geopolitical risks, tempers investors' appetite for riskier assets and further benefits the JPY's relative safe-haven status.

The Bank of Japan struck a dovish tone at the end of the March meeting and stopped short of offering any guidance about future policy steps, or the pace of policy normalization, which caps gains for the JPY.

Odds of a June Fed rate cut dip below 50% after data released this week showed that the US manufacturing sector expanded in March for the first time since September 2022 and that demand for labor remains elevated.

The US Bureau of Labor Statistics (BLS) reported in the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday that the number of job openings on the last business day of February stood at 8.75 million.

A separate report by the Commerce Department's Census Bureau showed that new orders for US-manufactured goods rebounded more than expected, by 1.4% in February following a 3.8% drop in the previous month.

San Francisco Fed President Mary Daly said on Tuesday that inflation is gradually decreasing, though the process is erratic and gradual, and that maintaining the status quo is the appropriate policy at present.

Adding to this, Cleveland Fed President Loretta Mester expects the central bank to cut rates later this year, though noted that moving rates down too soon would risk undoing the progress made on inflation.

This comes on the back of Fed Chair Jerome Powell's remarks on Friday, saying that there was no need to be in a hurry to cut interest rates and raised doubts if the central bank will cut rates three times this year.

The yield on the benchmark 10-year US government bond advanced to a four-month high, helping the US Dollar to stall the overnight pullback from a multi-month top and acting as a tailwind for the USD/JPY pair.

Technical Analysis: USD/JPY extends its consolidative price move in a familiar range, bullish bias remains

From a technical perspective, the range-bound price action witnessed over the past two weeks or so might still be categorized as a bullish consolidation phase against the backdrop of a strong rally from the March swing low. Moreover, oscillators on the daily chart are holding in the positive territory and are still far from being in the overbought zone. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside. That said, bulls might need a sustained breakout through the trading range resistance, around the 152.00 mark, or a multi-decade high before positioning for any further appreciating move.

On the flip side, the lower end of the aforementioned trading range, around the 151.10-151.00 area, is likely to protect the immediate downside. Some follow-through selling below the 150.85-150.80 horizontal resistance breakpoint, now turned support, could expose the next relevant support near the 150.25 area. This is closely followed by the 150.00 psychological mark, which if broken decisively might turn the USD/JPY pair vulnerable to accelerate the corrective decline further towards the 149.35-149.30 region before eventually dropping to the 149.00 mark.

Source:FXStreet

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FastBull Featured

Daily News

[Quick Facts]

1. Daly says three rate cuts is a reasonable expectation for 2024.

2. U.S. Job openings rise modestly.

3. OPEC oil output stays steady as the group's latest cutbacks stall.

4. Mester says the Fed is likely to start cutting rates in June.

5. U.S. and global economy continues to improve, U.S. bond bulls losing.

[News Details]

Daly says three rate cuts is a reasonable expectation for 2024

Fed officials repeated last month that three rate cuts are expected for 2024. "I think that is a very reasonable baseline," said San Francisco Fed President Mary Daly in a speech on Monday. Given the strong economic growth momentum in the U.S., however, there is no urgency to adjust the bank rates, and staying put is right currently.

Inflation is falling but at a bumpy and slow pace. The timing and size of rate cuts will depend on how fast inflation slows and whether the economy weakens. Three rate cuts for 2024 is a forecast, not a commitment, and it is too early to take this as a pre-determined path.

U.S. Job openings rise modestly

The U.S. Bureau of Labor Statistics released the results of the Job Openings and Labor Turnover Survey (JOLTS) showing that the number of job openings at the end of February was 8,756,000, largely in line with market expectations of 8,760,000, while the January figure was revised down from 8,863,000 to 8,748,000.

The data suggests that U.S. labor demand is stabilizing at a high level. Layoffs rose to a nearly one-year high during the month, driven by increased layoffs in the leisure and hospitality sector. However, the quits rate, which measures voluntary job leavers as a share of total employment, held at 2.2%, the lowest level since 2020, suggesting that people lack confidence in their ability to find other jobs in the current market or reflecting a narrowing of the wage premium for those seeking to change jobs.

While the number of job openings has fallen back from its peak, the pace of decline has slowed markedly since it dropped below 9 million last October. The ratio of job openings to the number of unemployed has fallen to 1:1.36, a four-month low, suggesting that the U.S. labor market remains tight.

As the unemployment rate rises and the ratio of job openings to the unemployed falls, wage pressures are expected to weaken further. With the labor market coming into better balance, the Fed should feel more confident about cutting rates this summer.

OPEC oil output stays steady as the group's latest cutbacks stall

OPEC's crude oil production held steady last month, but some members stalled on the production cutbacks. OPEC produced 26.86 million barrels of crude per day in March, virtually unchanged from the previous month, according to a survey. It has been three months since a new deal was struck to prop up oil prices by cutting production, and several OPEC countries, such as Saudi Arabia and Kuwait, are adhering to the deal, but some others are not. Iraq, the United Arab Emirates, and Gabon together have produced hundreds of thousands of barrels a day, exceeding their agreed quota.

Mester says the Fed is likely to start cutting rates in June

Cleveland Fed President Loretta Mester said in a speech Monday that the Fed has made substantial progress on disinflation, but the inflation rate is still above the 2% target. Inflation for January and February was more stubborn than in the second half of last year, proving once again that the disinflation process will be "bumpy".

Economic growth is expected to slow somewhat this year compared to last year, but it will be slightly above the trend growth of 2%; the labor market is expected to remain balanced this year, with the unemployment rate rising slightly from its current very low level; and further progress in disinflation is expected to be made but at a slower rate than last year.

The greater risk at this point is to start cutting interest rates too soon, and the Fed does not have to take risks to do so in the context of a strong labor market and economic growth. Monetary policy is in a good place right now. If the labor market deteriorates, the Fed can cut rates quickly. If inflation stagnates, the Fed will maintain a restrictive monetary stance for longer. The Fed is not expected to gain enough confidence to decide on rate cuts at the next FOMC meeting, but things could change at the June meeting.

U.S. and global economy continues to improve, U.S. bond bulls losing

With the cyclical strength of the U.S. and global economies, the risk of a sustained rise in U.S. Treasury yields has increased, and long positions are reduced. Leading indicators point to a cyclical upturn in the U.S. and global economies, and the current indicators have confirmed this. 10-year U.S. bond yields have been rising steadily throughout the year, recently driven by real yields. Judging from this, the market is perhaps largely assuming that U.S. bond yields will move higher. The non-farm payrolls data due Friday could challenge this as the job market shows signs of slowing. However, the data is unlikely to change the current market expectation or reduce the risk of higher inflation.

[Focus of the Day]

UTC+8 17:00 Eurozone HICP (Mar)

20:15 U.S. ADP (Mar)

21:45 Fed Governor Bowman Speaks

22:00 U.S. ISM Non-manufacturing PMI (Mar)

Risk Warnings and Disclaimers

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Thomas

Economic

Forex

The yuan is a whisker away from the weak end of its onshore trading band, the latest sign that a recent slew of upbeat economic data hasn’t been enough to bolster the Chinese currency.

China’s currency slid to a four-month low against the dollar in onshore trading Tuesday and came within a few pips of the lower end of the trading range permitted by the central bank. In the more freely traded offshore market, the yuan has been hovering at a weaker level than the onshore daily limit for some eight consecutive sessions. Signs of stress are also growing in the options market.

The persistent pressure on the currency indicates that traders expect Beijing to lean on a weaker yuan to help revive growth in the absence of massive stimulus. Its task is complicated by the need to prevent disorderly capital outflows. To stabilize the market, policymakers stuck with its support for the foreign-exchange market with a stronger-than-expected daily fixing on Wednesday.

The phenomenon also mirrors the broader Asian trend, where regional currencies have buckled under the weight of a stronger dollar as the Federal Reserve signals it’s in no rush to ease policy.

The central bank is sticking to the currency stability playbook, said Christopher Wong, strategist at Oversea-Chinese Banking Corp. But “with most Asian currencies depreciating, I won’t rule out the scenario that policymakers are taking the opportunity to let the yuan depreciate slightly” to be in line with others, he added.

Here are three charts that show the yuan’s stress in currency markets:

Testing Boundaries

The yuan traded less than 20 pips away from the lower daily trading limit against the dollar on Tuesday, the nearest it’s been to the band since November. The managed currency’s move is confined to 2% on either side of the daily reference rate, known as the fixing, set by the People’s Bank of China.

Investors were briefly blocked from some yuan swap transactions that implied the currency was outside the weak end of its fixed trading band against the dollar on Tuesday, according to traders.

Yuan Pressure Mounting as Green Shoots Fail to Lift Mood_1

Beyond Limit

The offshore yuan, which faces far fewer restrictions, has been trading at a weaker level than the lower end of the onshore trading band for eight sessions as of Tuesday. That’s the longest stretch since the People’s Bank of China made its yuan fixing regime more market oriented in August 2015.

Yuan Pressure Mounting as Green Shoots Fail to Lift Mood_2

Buying Protection

Bearish yuan sentiment is also picking up in the options market. A gauge of demand for one-month dollar-yuan call options over put options, a measure known as risk reversal, remains elevated after touching a seven-month high late last month.

Yuan Pressure Mounting as Green Shoots Fail to Lift Mood_3

Source: Bloomberg

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Zi Cheng

Stocks

US Equity Markets: US Factory Orders and Job Openings

On Wednesday, overnight US economic indicators warrant investor attention amidst increasing uncertainty about a June Fed rate cut.

JOLTs job openings remained steady at 8.75 million in February after a downward revision to the January reading of 8.86 million. Economists forecast JOLTs job openings of 8.75 million. Importantly, the quit rate rose, signaling workforce confidence in labor market conditions. JOLTs job quits rose from 3.446 million to 3.484 million.

Factory orders beat expectations, rising by 1.4% in February after sliding by 3.8% in January.

10-year US Treasury yields ended the Tuesday session up 0.93% to 4.353%, down from a session high of 4.405%.

On Tuesday, the Nasdaq Composite Index and the S&P 500 declined by 0.95% and 0.72%, respectively. The Dow slid by 1.00%.

Asia Economic Calendar: Service Sector PMIs in the Spotlight

On Wednesday, the Asian economic calendar will also warrant investor attention. Numbers from China could drive demand for riskier assets after better-than-expected manufacturing data.Economists forecast the Caixin Services PMI to increase from 52.5 to 52.7 in March. The figures will likely influence buyer demand for ASX 200 and Hang Seng Index-listed stocks.Service PMI numbers from Japan may influence the Bank of Japan rate path. The BoJ is eyeing the services sector to fuel demand-driven inflation. Economists expect the Jibun Bank Services PMI to rise from 52.9 to 54.9 in March.

Commodities: Crude Oil, Gold, and Iron Ore Price Trends

Commodity price trends can impact market risk sentiment and the ASX 200. Crude oil and gold prices were higher on Tuesday. SGX TSI Iron ore prices also trended higher.

The USD/JPY, the Intervention Zone, and the Nikkei

The Nikkei remains in the hands of the USD/JPY and the Japanese government. Falling bets on a June Fed rate cut could drive buyer demand for the US dollar. An accommodative Bank of Japan would leave the Japanese government to counter a USD/JPY break above the 152 barrier.

The Futures Markets

On Wednesday, the ASX 200 and the Nikkei were down 30 and 230 points, respectively.

ASX 200

The ASX 200 declined by 0.11% on Tuesday. Tech stocks pressured the ASX 200 on fading expectations of a June Fed rate cut. The S&P ASX All Technology Index (XTX) ended the session down 0.52%. Bank and mining stocks had mixed sessions. However, gold (XAU/USD) and oil limited the losses.

Gold (XAU/USD) stocks Northern Star Resources Ltd. (NST) and Evolution Mining Ltd (EVN) surged by 2.56% and 5.87%, respectively.

Woodside Energy Group Ltd (WDS) ended the session flat, while Santos Ltd (STO) advanced by 1.16%.

BHP Group Ltd (BHP) and Rio Tinto Ltd. (RIO) ended the day up 1.94% and 0.68%, respectively. Iron ore prices advanced on the Singapore futures exchange, supporting the Tuesday session gains. However, Fortescue Metals Group Ltd. (FMG) bucked the trend, falling 1.09%.

National Australia Bank Ltd. (NAB)and Westpac Banking Corp. (WBC) rose by 0.52% and 0.04%, respectively. ANZ Group Holdings Ltd. (ANZ) and Commonwealth Bank of Australia (CBA) saw losses of 0.03% and 0.22%, respectively.

Hang Seng Index

On Tuesday, the Hang Seng Index rallied 2.36%. Real estate and tech ended the session in positive territory. The Hang Seng Tech Index (HSTECH) and Hang Seng Mainland Properties Index (HSMPI) saw gains of 1.89% and 1.90%, respectively. Investors responded to the better-than-expected private sector PMIs from China.

Tencent (0700) and Alibaba (9988) advanced by 1.78% and 1.07%, respectively.

Bank stocks had a positive start to the second quarter. HSBC (0005) rose by 1.23%. China Construction Bank (0939) and Industrial Commercial Bank (1398) rallied 2.75% and 2.28%, respectively.

The Nikkei 225

The Nikkei gained 0.09% on Tuesday. A steadier USD/JPY offered market comfort despite hovering within the intervention zone. Semiconductors tracked their Nasdaq-listed counterparts into positive territory, delivering the gains for the Nikkei.

Bank stocks saw more losses after the Monday sell-off. Sumitomo Mitsui Financial Group Inc. (8316) and Mitsubishi UFJ Financial Group Inc. (8306) declined by 0.12% and 0.03%, respectively.

It was another mixed session for the main components of the Nikkei.

Tokyo Electron Ltd. (8035) rallied 3.42%, with Fast Retailing Co. Ltd. (9983) advancing by 0.13%.

However, Softbank Group Corp. (9948) and Sony Group Corporation (6758) fell by 0.39% and 0.27%, respectively. KDDI Corp. (9433) ended the session down 0.04%.