Last week (September 19-23), as the Federal Reserve raised interest rates, the cotton market continued to decline in search of a bottom, and the main December contract of ICE cotton futures once again approached the 90-cent mark. At the same time, the supply of cotton in the new year has roughly taken shape, while cotton consumption continues to decline. When there is no new stimulus to supply, the market begins to sink into the quagmire of declining demand and cannot extricate itself.
As expected, the Federal Reserve announced last week that it would raise its benchmark interest rate by 75 percentage points. Although the market was prepared for this, Powell’s tough stance on raising interest rates caused cotton prices to fall further. He said that because the U.S. economy is not cooling at an appropriate rate, interest rate policies are being formulated to raise interest rates in the long term. Although this approach will cause short-term pain, it will cause less harm than allowing inflation to continue. Currently, the U.S. inflation rate is still above 8%, and there is still a long way to go to reach the 2% target. The problem of high inflation is likely to continue until next year. In the meantime, rising interest rates will continue to dampen economic growth, causing financial and commodity markets to remain under heavy pressure. At present, international oil prices have returned to the price of a year ago, and so has cotton.
Whether it is expected consumption or visible purchases, cotton demand is becoming increasingly bleak at this stage, becoming a key factor in determining the market direction. At present, the purchasing power of consumers has shrunk significantly, and the sluggish state of downstream consumption has been clearly reflected in the upstream, and demand from textile mills is declining rapidly. The author has been tracking the U.S. consumer market for a long time. In the past three years of the epidemic, yarn demand in the United States has been very healthy. Until about a month ago, the U.S. industry began to reflect an increase in retail terminal inventory, or that the inventory was abundant, and the demand for upstream raw materials began to decrease. Yarn demand started to fall. Therefore, this drop in cotton prices is different from the panic overall drop in financial markets in June. At that time, cotton consumption was still normal, but this time there are real signs of demand collapse.
Taking U.S. cotton exports as an example, although the cumulative contract volume and shipment volume reached 8.3 million bales and 1.7 million bales respectively, which were higher than the 7.05 million bales and 1.45 million bales in the same period last year, there are more and more rumors about contract cancellation. Last week, only 46,000 bales of U.S. cotton exports were signed, while ICE futures prices fell 10 cents from the previous high during the same period, which shows that low prices did not stimulate more demand. On the other hand, there has been no significant reduction in factory price-point sales recently. Even if prices fall, textile factories are not in a hurry to solve on-call price sales of more than 5 million packages. This shows that companies lack sales orders and they know the market best. situation, which fully illustrates how bad the current demand situation is.
With the gradual launch of new cotton in the northern hemisphere, the pressure on cotton market supply will continue to increase, and demand cannot provide sufficient support for prices. This week, the market will pay attention to the hurricane trends in the United States. If there is no obvious threat to new cotton, the December contract may continue to test 90 cents, and may continue to test the previous low of 82 cents.
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