July 26 – Stock futures came under modest pressure overnight as traders anticipated today’s policy decision and post-report comments from the Federal Reserve. The VIX continues to trade near 14 this morning, reflecting the relative calm on Wall Street. Yet, traders are bracing for the possibility of a hawkish surprise in the policy statement and/or post-statement press conference. The dollar index is trading a bit lower near 101.2 this morning, while yields on 10-year Treasuries are trading weaker near 3.86% and yields on 2-year Treasuries are trading near 4.87%. The broader commodity sector also faced modest headwinds of anticipation ahead of the Fed statement, with crude oil prices modestly lower overnight, while the same was true for the grain and oilseed sector as well.
Fed fund futures trading put 99% odds on this morning that the Federal Reserve will raise its benchmark interest rate 25 basis points today, with the other 1% betting on a 50-basis point rate hike. That means that the market is all pretty much leaning in the same direction on a 25-basis point rate hike going into this afternoon’s decision. That’s been the sentiment for some weeks now. But we have seen a shift toward more of a hawkish sentiment for another rate hike in November over the past 24 hours, with nearly 43% odds of such now being traded, which is up from 39% yesterday and up from 28% a week ago. That hasn’t halted the upward trend for stocks, with traders remaining convinced that the economy will have a soft landing with much lower rates coming next year, but it does reflect a shift of sentiment to something more in line with what Fed members have been saying for some time. I’ll primarily be watching for two things in this afternoon’s statement and press conference. First, will the Fed continue to emphasize the need to keep rates “higher for longer” going forward, and second, will the Fed acknowledge the risk at hand from commodity inflation as seen in recent moves in the energy and food-based commodity markets?
China’s rice crop remains at risk due to a persistent wet pattern plaguing production areas in the Yangtze River Valley and south China provinces. The pattern has been excessively wet for some time, and now Typhoon Dussuri risks making matters worse from Thursday through much of next week. Rainfall is expected to be 30 – 70% above normal through the period as the Typhoon slowly drifts across the region. Keep in mind that field reports are few and far between in China, so little hard evidence of significant production problems is currently available. But this will be something to monitor in regard to food needs, as well as potential corn displacement as lower quality rice makes its way into the feed stream, just as we saw with this year’s wheat crop following persistent rains.
Ridge-running storms continue to provide unexpected moisture for portions of the Midwest on almost a daily basis. The rains are welcome, although they’re not sufficient to keep the Midwest as a whole sufficiently watered to deal with this week’s intense heat – especially in areas west of the Mississippi River. The good news is that the high-pressure ridge begins to break down next week, allowing temperatures to moderate and rainfall to again increase. The question will remain, how much damage is done during this week’s heat? Scouts typically increase their field checks as we get into August, which should start to provide a better look at the yield potential of this year’s corn and soybean crops. There can be a big difference in a year like this between what a field looks like from the road, and what one actually finds when they walk the field to examine the crop. That difference can go in both directions. I anticipate that we will have some regions where the crop yields much worse than expected, with other areas where it comes in much better than expected. That’s usually not a recipe for a record national yield, but it does still leave the door open for a possible “good” crop.
It was another relatively quiet night on the Ukraine front regarding Russian strikes on Ukraine export infrastructure. The world is adequately supplied with corn and wheat currently, thanks to a record Brazilian corn harvest and remaining surplus supplies from last year’s big Russian wheat crop. Recent price volatility has largely been about a year or two down the road prospects if Russia continues to destroy Ukraine’s export infrastructure. Additional attacks are expected, but the market reacted Tuesday to reports from British intelligence that Russia may be planning attacks on civilian ships, along with reports that Russia is placing additional mines near Ukrainian waters. That was countered by commitments from the European Ag Commissioner committing Europe to developing land-based “solidarity lanes” for exporting Ukraine grain and oilseeds, with freight subsidized by the EU. This will be easier said than done, but the EU appears committed to making it happen, with the goal of achieving 4.5 million metric tons of exports per month down the road.
