Perspective: Mid-Day Commentary for October 26

By: Arlan Suderman, Chief Commodities Economist

Tue, 26 Oct 2021, 16:59

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

October 26 - It was "risk-on" on Wall Street following strong earnings reports amid rising consumer confidence. The Dow and S&P stock indices surged to fresh record highs, with the tech sector knocking on the door of record highs. The VIX traded above 16 as we approached midday, reflecting increased nervousness at these high stock levels, but there are still no signs of panic among traders. The dollar index firmed to trade near 94.0, while yields on 10-year Treasuries traded near 1.62%. Crude oil prices are 1% higher, although still below yesterday's fresh seven-year highs. The Ags are mostly higher at midday.

Broad-based money flow supported both the equities and the commodities today. That doesn't mean that every asset saw positive gains, but the positive money flow certainly provided support for those assets that had decent fundamental support. However, most of them also came off their highs midday as that money flow slowed. Fundamentally, the greatest support is seen in the hard red wheat markets due to tight global milling wheat supplies, as well as the edible oils, although soyoil saw some profit taking today. The live cattle market pushed higher on firmer cash expectations on strong slaughter expectations. The feeder appears to finally be garnering a bit more leverage than he/she has had over the past six months. Buying increased when the lead December contract finally managed to break through the 50-day moving average. However, lean hog futures remain under pressure as feeders lose leverage amid rising supplies.

The Conference Board's consumer confidence index rose to 113.8 for October, up from 109.8 previously and above analyst expectations of 109.0. That reversed a three-month downtrend in the index as Covid numbers spiked this summer. However, confidence is rising again as Covid numbers plummet. Short-term inflation concerns rose to a 13-year high in the survey, according to the Conference Board, although its impact on consumer confidence was muted. That's likely because the consumer continues to be cash-rich due to massive fiscal and monetary stimulus still in the system. The Conference Board reports that "the proportion of consumers planning to purchase homes, automobiles, and major appliances all increased in October." That provides evidence that the economy will continue to grow in the months ahead. Nearly half (47.6%) of survey respondents say they intend to take a vacation in the next six months, which is back to pre-pandemic levels.

Currency in circulation in our economy is still at $2.2 trillion, despite higher costs for goods and services, up from $1.8 trillion prior to the pandemic and up from $1.0 trillion a decade ago. M2 money supply is at $21 trillion, up from $15.4 trillion prior to the pandemic. The consumer still has plenty of money to spend to support inflation pressures in the months ahead, especially with consumer confidence rising again. That's showing up in market expectations for inflation, as shown in the 5-year breakeven inflation rate graphic below. The graphic shows the market's expectations for inflation five years out, which is currently surging toward 3%. The Fed continues to argue that it doesn't need to act because inflation will still average 2% over the long-haul, although they do not define the scope of that time period for averaging inflation.

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