Laws of Motion in the Futures Market

July corn (CN3:CBOT) has accelerated off the test of a contract low. And like the situation pointed out in wheat last week, corn has overbalanced to the upside, paving the way for a reversal of the seven-month downtrend.

The nascent momentum present in these individual markets speaks for itself. They're in redefined or newly defined uptrends. But taken together, here's a scenario that the momentum in the three markets portrays.

The rally in 10-year notes and other debt instruments is in response to the Federal Reserve's desire to ward off "the probability of an unwelcome substantial fall in inflation." This statement was released at last week's monetary policy meeting, and it demonstrates the Fed's new intermediate-term concern. The assumption is that the Fed will become a heavy purchaser of three-, five- and 10-year Treasury securities to fight deflation.

Until a new external force is applied -- until the big buyer or the perception of a big buyer (the Fed) gets out of the way -- momentum in debt prices remains to the upside and has the Law of Inertia on its side.

The U.S. isn't alone in its focus to ward off deflation, a factor that will add to the debt market's upside inertia. The world's three largest economies are all worried about it. In Japan, where short-term interest rates are already essentially at zero, deflation has been a concern for years. And at its monetary policy meeting last Thursday, the European Central Bank (ECB) altered slightly the wording of its policy statement to indicate that it too is concerned about the economic debilitation -- deferred spending -- that can be caused by falling prices.