Perspective: Mid-Day Commentary for January 6

By: Arlan Suderman, Chief Commodities Economist

Fri, 06 Jan 2023, 16:26

Perspective: Midday Commentary

Guest Commentary by Mike Castle

Market Intelligence - Fertilizer Analyst

January 6 - Stocks are surging higher at mid-day, while the VIX cools further to hover around 21.6 at the time of writing. The dollar has reversed course through the morning, falling to trade near 104, while treasuries are also falling, with 10-year yields trading below 3.57% and 2-year yields trading around 4.26%. Crude oil is clinging to morning gains, with nearby WTI still hovering just below the $75 mark, while the ags are mixed, with soybeans now pushing considerably higher as spreads invert further.

The U.S. services sector contracted unexpectedly in December for the first time since May 2020 during the height of the pandemic, with today's ISM Non Manufacturing PMI showing a reading of 49.6, a steep drop from the 56.5 seen in November and far below market expectations of 55. Readings above 50 indicate expansion in the U.S.'s non-manufacturing economy, while readings below 50 indicate contraction. Excluding the pandemic lows in 2020, this is the lowest reading for the index since November 2009, when the U.S. economy was still grappling with recession. New orders fell hard, with that portion of the index showing a reading of 45.2 compared to the 56 seen in November, while overall service sector business activity also dropped significantly to 54.7 vs. 64.7 in the month prior. Price pressures eased significantly, showing a reading of 67.6 compared to the 70 on November's report and a far cry from the peak of 84.6 back in April. Overall, today's data was a great representation of the current situation--cooling inflation, but at a cost to the economy.

Factory orders fell 1.8% month-on-month in November, well below forecasts of a 0.8% decline and the sharpest drop seen since the pandemic fallout in spring 2020. This snapped a three month streak of monthly increases, though October's data was also revised downward to show a 0.4% increase. The sharpest drops were seen in orders for transportation equipment and durable goods, while orders increased slightly for computers and electronic products. Even excluding transportation, factory orders fell 0.8% month-on-month in November after increasing slightly in October.

The market will be hearing from a plethora of Fed members today, with Lisa Cook, Raphael Bostic, and Tom Barkin all due to give speeches in the coming hours. Yesterday's comments showed the Fed's commitment to remaining hawkish for longer than traders hope, so it would be a surprise to hear much deviation today. It's interesting to watch the trade's response to data releases in our current environment, as bad news has become good news and vice versa. Negative economic indicators, coupled with a slowing pace of wage growth, don't sound like they should be factors driving equities higher, but traders take this as the potential for a dovish approach to creep back in at some point in 2023. With the Fed not due to reconvene until the end of the month, this back and forth speculation will likely continue as it did through 2022, with Fed members having to do their best to convince the market that they are committed to staying the course.

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