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By: Dan Hueber

Markets in general appear to be on edge this morning and this extends beyond commodities.  This does not necessarily mean they are lower, although there is a fair share of red ink showing up but rather just a heightened sense of uncertainly.  The reason?  This is the day that Fed Chairwomen Janet Yellen is set to address the gathering of economists, financiers and the like who have gathered in Jackson Hole, Wyoming for the annual conference hosted by the Kansas City Federal Reserve.  It must be almost heady to wield the kind of power that Dr. Yellen has with the entire world hanging on each and every word that she utters but I must admit that unlike some of her predecessors, she does not appear to possess an oversize ego. Regardless, the world is waiting anxiously today to see if she will provide any kind of definitive guidance as to the Fed’s next move with interest rates.  As I have commented recently, there have been a number of rather ambiguous statements made by other Fed governors leading up to this event concerning a rate hike, possibly with the exception of KC President, Esther George, who is one of the more hawkish Fed presidents and a proponent of a hike in rates. It would seem that Dr. Yellen is leaning in that direction as well.  It would appear that markets also believe that will be the case as well. Recent activity tracked by Bloomberg tells us there is a 32% probability of a September rate hike, which is up 12% in the past week and a 57.4% probability for a December bump higher compared with 47.3% the previous week.

Of course we have all seen and heard this type of speculation before and there is certainly no assurance it will be correct.  At this point, only Janet Yellen and possibly whoever helped her prepare the comments actually know what she will say today at 10:00 ET.  Wouldn’t it be quite a disappointment for everyone if she provided nothing definitive?  Watchers would be forced to resort to trying to interpret her facial expressions and body movement for clues. “Did you see how she raised her left eyebrow when mentioning Fed Fund rates? That surely means she is favoring a rate increase.” Taken a step further, would a 25 basis point hike in rates really be anything more than symbolic?  Regardless, markets believe it is and in this day and age where those who believe they have to be the first to react in order to profit from every opportunity, her comments could provide quite a bit of volatility in the financial world.

For us in the commodity sector, the real impact of a rate move should not be significant but knowing it would potentially create a big swings in the dollar, indirectly we could be affected.  It is interesting to note that right now we have a somewhat conflicted picture in the dollar index.  Short-term the recent slide has left us in an oversold position so a suggestion by the Chairwomen of a boost in September could bring a rush of buyers back in. That said dovish comments would have the opposite effect and with longer term charts having just turned lower it could be enough to finally send us down through support that has held for the past year and a half, which in turn could provide a much needed shot of adrenaline for commodities.  Indeed, there is a good reason markets are on edge this morning.

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