July 25 – Treasury yields pushed higher this morning as the Federal Open Market Committee prepared to begin two days of policy meetings. The VIX remains near 14 this morning, reflecting relative calm on Wall Street as it anticipates what it believes to be the final 25-basis point rate hike of the cycle. The dollar is again firm as Treasury yields rise, with the greenback trading near 101.5 this morning, which is its highest level since July 12th. Yields on 10-year Treasuries are trading near 3.91%, which is also their highest level since July 12th, while yields on 2-year Treasuries are trading near 4.90%. Crude oil prices are pulling back modestly this morning, along with much of the rest of the commodity sector, after surging through key chart resistance at the 200-day moving average. Headwinds for the commodities come from rising interest rates, a stronger dollar, and a quieter night in Ukraine. That also allowed for a double-digit pullback across the board for the grain and oilseed sector overnight.
The Federal Reserve begins two days of meetings this morning to discuss potential changes in its monetary policy, with a statement release scheduled for tomorrow afternoon, followed by a press conference. The markets are convinced that the Fed will bump its benchmark interest rate another 25 basis points higher, with a little better than 30% odds that we’ll see another rate hike later in the year, before rates start to fall next year. Those are the expectations baked into the market at this point. One can see what you want to see in the economic data to justify your position. There are numerous economic data points signaling that previous rate hikes are working, and that therefore should justify a pivot by the Fed next year. There are several data points suggesting that the economy remains quite resilient, with some inflationary factors still intact, arguing for the Fed to remain hawkish. But the important thing to focus on is, what has the Fed said about its objectives and its focus? The Fed repeatedly stated its commitment to its 2% mandate, and the challenges that wage inflation and shelter present in reaching that objective. Shelter indicators are trending lower, although sustaining the move amid improving consumer sentiment may prove difficult when housing supplies remain tight. However, the jobs sector does remain tight, with recent data points indicating that it is again getting tighter. That doesn’t mean that rates necessarily need to go higher beyond this week’s meeting, although that possibility definitely remains on the table, but it does suggest that they may stay higher for longer than the market currently anticipates, until more pain is inflicted on the economy.
An additional challenge for the Federal Reserve will be if commodity inflation returns. Declining commodity prices have been a major contributor to pulling the headline inflation number back down to 3% in the latest report. It’s very significant that WTI crude oil broke higher above chart resistance at the 200-day moving average on Monday, signaling that market dynamics are different than they’ve been over much of the past year when money flowed out of the commodities on recession fears. The food-based commodities are also on the rise, driven by fears that Russia will continue to destroy Ukraine’s future export capacity. The world can live without Ukraine’s corn and wheat near-term because Russia still has cheap supplies of wheat and Brazil has cheap supplies of corn for the world market. But the world will need Ukraine’s supplies longer-term. The worry is that Ukraine farmers will quit planting if they lose the ability to export, and then those supplies will not be there when exports are again possible. We still do not know if the market will remain focused on those fears, providing strength to the food-based commodities, but that presents a challenge for the Fed if they do. Even so, crude oil should serve as a lead indicator for commodity inflation since energy goes into so much of what we do in America.
China booked another 30 cargoes of soybeans last week – largely of Brazilian origin for August and September shipment, although a few Argentine cargoes were included as well. China currently has 6.8 million metric tons booked for loading this month, with another 6.2 mmt for next month and 3 mmt for September – largely from Brazil. This would put its marketing year (Oct – Sept) shipments above 100 mmt, up from 91.6 mmt the previous year. StoneX Brazil survey data suggests that the farmer there still has 45 mmt of this past year’s crop yet unsold, suggesting that he’ll have soybeans to sell well into the traditional U.S. export season. That would help ration U.S. export demand to offset yield losses if they would occur this year. My soybean yield model currently sits at 49.9 bushels per acre, which would tighten the U.S. balance sheet. My corn yield model is currently at 174.2 bpa, which would leave a bloated balance sheet, even if we use USDA’s optimistic demand estimates. The bottom line is that the corn and wheat markets are being propped up by fears addressed above surrounding the Ukraine war. We have yet to see if the headlines build on those fears or eliminate them. For today, they’re taking a breather.
