Perspective: Mid-Day Commentary for May 19

By: Arlan Suderman, Chief Commodities Economist

Fri, 19 May 2023, 16:41

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

May 19 - Federal Reserve Chair Jerome Powell spoke this morning at a conference in Washington, D.C., sending stocks lower and the VIX higher, intensifying the debate once again on the direction of rate hikes from this point forward. The VIX rose to trade near 17 this morning, which is still low by recent standards, while stock futures erased early gains to slip negative. The dollar also fell with Treasury yields during his comments. The dollar index currently sits near 103.1, while yields on 10-year Treasuries are near 3.67% and yields on 2-year Treasuries are near 4.27%. Both are well off two-month highs posted earlier in the session. The commodity sector started the day with modest gains, but today's headwinds took the wind out of that sail, with crude oil prices down modestly and the grain and oilseed markets now mixed following a week of sharp losses.

Kansas City wheat was unable to hold overnight gains, quickly turning lower to reach new lows for the move as this week's rebalancing continues. Kansas City prices had reached such high levels that arbitrage opportunities opened for European imports into the United States, as well as a significant increase in blending soft red winter and some hard red spring into mixes to displace hard red winter supplies that are tight. The markets are now accounting for that. Soybean prices were the next to erase early losses amid poor export demand and a big Brazilian crop. Corn prices tried to hold onto gains on bargain-hunting buying, but that's becoming increasingly more difficult as the day progresses.

Fed Chair Jerome Powell spoke today of tightening credit. Indeed, the Fed's survey of senior loan officers shows a sharp tightening in standards for loans at both the consumer and business level. This tightening of credit does much of the work for the Fed of slowing down the economy to tame inflation, although wage inflation is only just now starting to see some softening. There's still a lot of work to do before we see inflation get back to the Fed's 2% mandate, but the tightening credit reduces the need for the Fed to be as aggressive with rate hikes. Powell conceded today that, "The risks of doing too much or doing too little are becoming more balanced and our policy adjusted to reflect that." He went on to say, "We haven't made any decisions about the extent to which additional policy firming will be appropriate." Fed fund futures priced in near equal odds of another rate hike at the June meeting earlier this week, but odds of another rate hike fell to just 18% following Powell's comments this morning.

Is the drought ending? It would certainly appear so. The Drought Monitor is usually what is used to show where drought is a problem, but it's a lagging indicator. Another indicator that I like to use is NASA's soil moisture measurement tool. The graphics below show soil moisture percentile in the top 16" of the profile on April 18 (left) and on May 18 (right). Note the dramatic improvement in soil moisture across the Midwest and Plains. There are still pockets of dryness, but many of these still have enough moisture to germinate seed, and the overall pattern is trending wetter. Granted, the next two weeks will see a dry pattern across much of the Midwest that will facilitate rapid completion of this year's planting - with the exception of the far northwestern Ag Belt - but the overall pattern is expected to favor good moisture and mild temperatures for the summer, which increases the odds of a trend or higher corn and soybean yields. We are moving into an El Nino growing season. That was step number one toward improving our odds of good crops this year. Step two was to see cool waters off the West Coast moderate, and that is rapidly occuring as well. Continuation of that pattern does not eliminate the risk of drought, but it dramatically decreases those odds. That's why the market is betting on big crops this year before we've even seen our first crop ratings.

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