Perspective: Mid-Day Commentary for March 25

By: Arlan Suderman, Chief Commodities Economist

Fri, 25 Mar 2022, 15:34

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

March 25 - Talk of the potential for much faster rate hikes by the Federal Reserve boosted financial stocks this morning, providing an overall lift for the Dow Jones Industrial Average, while the tech sector remained cautious, due to concerns what higher rates would mean for it. Commodity prices were well-supported overnight, but they turned lower on reports that a peace agreement may be in the works in Ukraine. The VIX traded near 22 as we approached midday, reflecting easing concerns on Wall Street. The dollar index traded near 98.7, while yields on 10-year Treasuries surged to a fresh 34-month high above 2.50%. Crude oil prices were mixed, while the Ag sector continued to chop around on both sides of unchanged today as well. Live cattle futures traded quietly firmer ahead of this afternoon's USDA cattle-on-feed report.

Russian troops have failed to capture a single large city within Ukraine, with the top prize of Kyiv being particularly elusive for them as the war moves into its second month. The war has certainly taken its toll on Ukraine, with Russia sending bombs into many of its cities targeting civilian residences - leveling them in some cases. Yet, Russia's military appears ill-prepared for the length of the campaign to this point, with its own toll on troops and equipment starting to mount. Perhaps that has combined with the increasing pain of western sanctions to cause President Putin to reconsider Russia's strategy. Turkey reported this morning that Russian and Ukrainian negotiators had come to somewhat of an agreement on five of seven points being discussed. Russia's Defense Ministry also released a statement saying that the first phase of its operation was mostly complete, and that it would now focus on "liberating" the two eastern regions that had previously been claimed by Russian-backed separatists, which is has still not been able to claim. That suggests that Russia may be pulling back from Kyiv, or rationalizing why its troops are in retreat, to focus on at least having something that it can claim for a victory for Putin, and a possible eventual end to the war.

Inflation expectations continue to rise, with added momentum coming from the rise in commodity prices as the war in Ukraine amplifies already previously existing tight supplies. The graphic below shows the correlation between the 5 -Year Breakeven Inflation Rate, which is the market's expectation for inflation in the years ahead, with the StoneX Commodity Index. The correlation is relatively strong over the past 10 years at 0.72, reflecting increased money flow into the commodities when inflation expectations are rising, and visa versa. The current focus revolves around the question of whether the Fed is being aggressive enough in its rate hikes to tame inflation, with a rising number of Wall Street analysts stating that it is not. That view is held by at least one member of the Federal Open Market Committee as well. Fund managers also took note of comments coming from world leaders at this week's NATO meeting stating that commodity shortages would become more common due to the Ukraine war. Yet, some of that increased money flow took a bit more of a cautious approach today when reports of peace talk progress were heard.

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Perspective: Mid-Day Commentary for August 7

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