Perspective: Mid-Day Commentary for November 10

By: Arlan Suderman, Chief Commodities Economist

Thu, 10 Nov 2022, 17:34

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

November 10 - The euphoria of this morning's better-than-expected inflation data continues to be the primary driver on Wall Street. The Dow Jones Industrial Average is up nearly 3% at midday, while the Nasdaq is up more than twice that. The VIX fell below 23 for the first time in two months as fear evaporates on Wall Street - all is well with our problems now in the rear view mirror. The dollar fell through the bottom of its ascending channel on the charts like a hot knife through butter, trading at two-month lows near 108.2. Yields on 10-year Treasuries are trading near 3.85%, which is nearly 50 basis points off last month's high. Crude oil prices are 1% higher, while the grain and oilseed markets are mostly lower. A sharp break in soymeal prices dragged soybeans lower as well, with momentum traders piling on as areas of chart support gave way. Losses are minimal with wheat thus far, while corn continues to face chart-related selling amid very disappointing export sales. Marketing year to date corn export sales fall short of the seasonal pace needed to hit USDA's current target by 346 million bushels, while soybeans fall short of the pace by 76 million and wheat by 18 million bushels. The strong dollar has been a problem for exports, and we are taking initial steps toward fixing that today. However, that doesn't fix the low water levels on the Mississippi River that continue to be a problem for exports.

Fed fund futures are now trading 85% odds of "just" a 50-basis point increase in the Federal Reserve's benchmark rate next month. Fed fund futures trading now reflect expectations that the benchmark rate will peak at 4.75% in March, up 100 basis points from its current level, as shown below, before starting to decline by the end of the year. That's 25 basis points lower than was expected 24 hours ago. The market has repeatedly done this over the past six months. It looks for any clues that might suggest that the Fed will soon max out rates and then trades those expectations - although not to the enthusiasm of today's move. Each time in the past, the Fed has proved the market wrong, and traders have been disappointed.

This may or may not be the time when the market is finally correct, but I do urge caution. I've seen at least one Fed member state today that it may be time to look at slowing the pace of rate hikes, but we heard last week from the Fed that it believed its mistake of the past was to reverse course too quickly, which allowed inflation to come back again. A breakdown of today's data shows that used cars and medical services led the decline that provided today's better-than-expected results, but prices for shelter are still accelerating - up 0.8% month-on-month and up 6.9% year-on-year. Transportation was also up 0.8% month-on-month and up 15.2% year-on-year. Fuel oil was up 19.8% month-on-month and up 68.5% year-on-year. We may be just on the front end of the escalation of prices for goods and services related to high diesel prices. I don't want to be the one throwing water on bullish embers, but I do want to maintain some perspective that risks are still very real when you break down the data. But for now, today's collapse in the dollar breaks significant chart support, which may lead to significant additional selling. That isn't helping the grain and oilseeds currently, but longer-term it should provide some tailwinds, assuming that they can generate some supportive fundamentals of their own. That's going to be difficult on the export side as long as water levels are low on the Mississippi River.

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