June 20 – Stock futures reversed holiday weakness to push modestly higher this morning, as Wall Street digests Wednesday’s Federal Reserve policy and comments in light of tariff and geopolitical tension headlines. The VIX is trading just above 19 this morning, while the dollar index trades near 98.7. Yields on 10-year Treasuries are trading near 4.42%, while yields on 2-year Treasuries are trading near 3.95%. Crude oil prices are mixed this morning after trading solidly higher earlier in the session, while the grain and oilseed markets are mixed. Corn and soybean contracts add some seasonal weather risk premium, while wheat prices pull back with seasonal harvest pressure.
The Federal Reserve concluded two days of meetings on Wednesday afternoon with the release of its revised monetary policy statement. As expected, there were few direct changes of policy of note, leaving the focus on Fed Chair Jerome Powell’s comments in the press conference that followed, as well as on the infamous dot plot graphic revealing the thinking of individual members of the Fed. That dot plot graphic still reflects expectations that the Fed will cut interest rates twice before the end of the year, but there isn’t a lot of conviction with that. In fact, 7 of the 19 members of the Fed see no rate cut at all this year. The Fed’s economic assessment included projections for slower growth, higher inflation and a softening labor market. Powell acknowledged that inflation is easing since the reciprocal tariffs started in April, but he stated that he still anticipates the inflation to show up in the hard data going forward. He tried to lean dovish in his comments, but that was difficult to do at times. Essentially, the Fed did what we expected it to do. It indicated that it doesn’t know what to expect from the tariffs, elevated geopolitical risks, and “One Big Beautiful Bill.” As such, it defaulted to its standard line that it will lean on the hard data for direction. That means doing nothing before at least September, and maybe longer.
The Iran – Israel war is now in its eighth day. It’s not officially called a war by the politicians, but try to tell those folks seeking shelter in bomb shelters in both countries that it’s not a war. To them, it’s a war. Israel is bent on continuing to make its strikes until it has eliminated the threat of a nuclear attack by Iran, while also hoping that it will weaken the current regime sufficiently to where a more Israel-friendly government can be set up by the Iranian people. The United States has similar goals, although it has not yet directly participated in the strikes on Iran. Nonetheless, it is being pulled into the conflict. President Trump would still likely prefer a diplomatic solution, but one critical component of that solution would need to be the total surrender of Iran’s nuclear program. Iran certainly prefers a diplomatic end to the fighting, since Israel continues to systematically destroy its military capabilities, but Iran continues to insist that it must be able to hold onto its nuclear program. Neither Israel nor the United States will give in to that demand, so the war continues.
Chinese President Xi Jinping held a call with Russian President Vladimir Putin on Thursday, urging Putin to use his influence with Iran to seek a diplomatic solution. Xi would like to be seen as the peacekeeper here, but his influence is quite limited. Iran has been a critical member of the axis of cooperation with China, Russia, and North Korea. Losing Iran through a regime change that is more friendly to the West would be a significant loss to both China and Russia. In fact, Iran supplies much of the military weaponry used by Russia in its fight with Ukraine. Russia doesn’t have the resources to get involved in Iran, as those are devoted to the war in Ukraine. China doesn’t want to get involved in the conflict, but it may need to do so if it sees sustaining the current Iranian regime as critical to its own security. One positive out of the situation from China’s standpoint is that the war necessitated that the United States pull some of its assets out of the Indo-Pacific region where China saw them as a threat to its sovereignty goals. Israel currently has the upper hand in the war, with the United States backing it. Iran’s chances of holding onto its nuclear capabilities, and regime’s ability to stay in power, come into greater question with each successive week that the war continues.
Soybean oil hit a new high for the move overnight, fueled by last Friday’s biofuel blending mandate proposal released by the U.S. Environmental Protection Agency. That provided support for soybeans as well, particularly for the new-crop months that will be most impacted by the policy. Additional support for both corn and soybeans came from traders adding a seasonal weather premium to prices. We’ll see heat build across the Midwest over the coming week, but it is expected to be transitory, with temperatures moderating as we move into the month of July. Yet, the longer-range models continue to show a hot and dry bias for the Midwest. They’ve been doing so for the past two months, and they’ve been wrong for the past two months. But traders are adding a bit of risk premium nonetheless, just in case we do see the pattern shift as the crops move into the more critical reproductive phases. Meanwhile, wheat prices came under modest seasonal pressure as the winter wheat harvest finally picks up a little momentum.
