I. Zhengmian (China's Cotton)

(1) Positive Factors

1) Logistics have recently eased in various regions, accelerating downstream circulation.

2) The RMB has depreciated rapidly recently, hitting 6.71 onshore today, a new low since November 2020. The rapid depreciation of the RMB is beneficial to the export of clothing enterprises.

3) A large number of textile mills took holidays and shut down before May Day. As production capacity has greatly decreased, the amount of goods circulating in the market is gradually decreasing, which is beneficial to cotton yarn sales in the future.

(2) Negative Factors

1) The outbreak of the epidemic in many places, including Beijing and Zhengzhou, has a short-term impact on the economy and logistics. The PMI in April was 47.4%, down 6.1 percentage points month-on-month. The epidemic has significantly slowed down the production and operation activities of enterprises, and the overall economy has been severely affected.

2) Downstream inventories have accumulated seriously, and the operating rate has dropped to the lowest level in the same period of history. Due to insufficient end-consumer demand and a lack of cotton yarn orders, textile mills' cotton yarn inventories have continued to accumulate, with an average inventory of 40.6 days, the highest historical inventory.

3) Slow sales of cotton on the supply side. As of May 5, the sales progress in Xinjiang was only 46.8%, lagging 50 percentage points year-on-year. With the repayment deadline approaching in May, ginneries must accelerate sales.

II. US Cotton

(1) Positive Factors

1) The recent escalation of the Russia-Ukraine conflict and the G7's announcement of a ban on Russian oil. The renewed escalation of the Russia-Ukraine conflict has pushed up energy prices, causing bulk commodities to be generally in a bullish atmosphere.

2) US GDP growth in the first quarter of 2022 was relatively weak compared to the previous quarter, but relatively high year-on-year, with a year-on-year growth rate of 3.57%. Personal consumption expenditure, the main driver of US economic growth, increased by 2.7%, and private investment increased by 2.3%, performing well, indicating that the US is still in an "overheated" state.

3) US cotton signing and shipment performance is good, supported by Chinese purchases. The data on US cotton signing and shipment in the week of April 28 were both outstanding. Net signings were 53,000 tons, an increase of 23,000 tons month-on-month, with China signing 23,000 tons. The shipment volume was 101,500 tons. If this shipment progress is maintained, the export target can be achieved.

4) Texas drought worsens month-on-month, weather premiums remain. To date, the drought in Texas and the entire United States has not eased, and there is no rainfall forecast for Texas in the next seven days.

(2) Negative Factors

1) The Federal Reserve's strong interest rate hike and balance sheet reduction are used to cope with the enormous pressure of current US inflation. On May 4, the Federal Reserve raised its target interest rate by 50 basis points, the first time the Fed has raised interest rates by 50 basis points at once in 22 years, and announced a reduction of $47.5 billion starting June 1. The effect of deleveraging through balance sheet reduction is more drastic, directly reducing the monetary base, and the impact on the market is "instantaneous".

2) Fund speculation has not continued to exert force, and funds maintain a wait-and-see attitude with net long positions. In the week of May 3, the proportion of net long positions held by funds remained at 40.4%, unchanged from the previous week, and non-commercial long positions did not continue to exert force.

3) Undesignated quantities have fallen back from high levels, and the undesignated quantity for July has decreased month-on-month. The basis for the July squeeze has weakened this week, with the absolute quantity of July undesignated contracts decreasing by 3,000 contracts this week.

Summary: On the macro level, the May interest rate meeting has concluded, with the Federal Reserve raising interest rates by 50 basis points, in line with market expectations, and the balance sheet reduction of $47.5 billion slightly lower than the previous market expectation of $95 billion. The Federal Reserve's one-time interest rate hike of 50 basis points is the first time in 22 years. The Federal Reserve's complete policy shift means that bulk commodities no longer have a monetary basis for price increases. However, the Russia-Ukraine conflict, which we are concerned about, is still escalating, and the United States has launched a new round of sanctions against Russia. The impact of the Russia-Ukraine conflict on energy prices and agricultural product prices should also be noted. On the industrial side, the domestic supply-demand contradiction is gradually increasing, with slow sales progress on the upstream supply side, an increase in downstream inventory accumulation month-on-month, and a continuous decline in production capacity, with the contradiction continuously intensifying. Although the weather in the United States remains dry, the basis for squeezing, the volume of undesignated contracts, and net long positions held by funds are all declining month-on-month. Profits for yarn mills in the Indian market are also shrinking continuously, and production capacity is continuously declining. The funds and Indian market factors that previously supported the rise in US cotton prices are weakening. The US Department of Agriculture will release its May report on Thursday night, which will be the first supply and demand forecast report for the 2022/23 season. The supply and demand pattern for the next season is a key issue to watch.

Focus: USDA report