March 20 – It’s Fed Day on Wall Street – the day in which we learn how sentiment among policymakers serving on the Federal Open Market Committee has changed regarding monetary policy. Stock futures consolidated quietly just below Tuesday’s highs overnight, as traders anticipate what might come out of the Federal Reserve today that could impact the future of the U.S. economy. The VIX is trading near 14 in early trade, while the dollar index traded at a 19-day high near 104.1. Yields on 10-year Treasuries are trading near 4.29% ahead of today’s Fed statement, while yields on 2-year Treasuries are trading near 4.69%. Crude oil prices traded nearly 2% lower this morning, pulling back from yesterday’s four-month high, while the grain and oilseed markets traded mixed to weaker as well.
The Federal Reserve’s biggest challenge today is to accurately communicate a message that will drive sentiment among both consumers and Wall Street traders in a way that will help reach its goal. That’s difficult to do when the receivers of its message have a strong bias in what they “want” to hear. The same message given to any group will be heard differently by those in the group, based on their bias of what they either “expect” or “want” to hear. We subconsciously set up filters that translate what we’re hearing. In this case, consumers “want” to hear that we’re about to see lower interest rates that will lower their payments on credit cards, while making buying a house more affordable. Wall Street “wants” to hear that interest rates are going down, which tends to stimulate the economy while increasing corporate profits. The bias of the hearer often results in the hearer hearing something different than what the messenger intended to speak.
The Fed is a victim of its commitment to transparency. Previous Fed Chair Ben Bernanke made a commitment 15+ years ago to increase transparency of Fed intentions, creating an environment where Wall Street is fixated on parsing every word coming out of the Fed. Several decades ago, the market would react to what it observed the Fed doing. Now it reacts to its interpretation of what it thinks the Fed will be doing in the future, as it translates the many statements and comments emerging from it and its members. The famous dot plot graphic contributes to that process, as it provides insight into the perceived thinking of individual policymakers. The Fed held consistent policy at its December meeting, but the dot plot graphic showed a change in individual member sentiment toward the possibility of several rate cuts in 2024. Fed Chair Jerome Powell acknowledged that the Fed was ready to start talking in the coming year about when it might start cutting rates. Both consumers and traders heard what they “wanted” to hear – that the Fed had pivoted policy. Wall Street hit new record highs, consumer buying ratcheted up, and the result was three consecutive months of hotter-than-expected inflation, which went against the Fed’s goal of seeing a continued downward trend toward its 2% inflation target. Its challenge now is to sound hawkish enough to “correct” the thinking of both consumers and traders, without swinging sentiment too far in the other direction, sending consumer sentiment into a damaging tailspin.
China has a new stimulus program. The government announced that it will offer subsidies to consumers to encourage them to replace used household appliances in their home, including TVs, washing machines, air conditioners, refrigerators, etc. Its essentially a plan to get consumers to buy more durable goods, hopefully replacing their older products with new more energy efficient ones, while stimulating the economy in the process. It’s hoped that the program will stimulate manufacturing, as well as give a boost to the recycling industry, to create jobs. This is another piece of the plan for transforming China’s economy from being export based to being consumer based, as Europe and the United States reduce their buying of Chinese goods. That’s a very difficult transition to make, and confidence is lacking that this plan will do much by itself to jumpstart the Chinese economy, but government officials see it as one more step in the right direction.
May corn futures are roughly 30 cents off their February low, while May soybeans are about 64 cents off their lows, after trading nearly 90 cents off those lows last week. The various wheat markets are roughly 10 to 20 cents off their lows. Fund managers still hold large short positions in these markets, although they have started to unwind them as we enter into a period of higher weather risk in major producing areas of the world. Corn and soybean prices are encountering greater farmer selling on this rebound, on both sides of the equator. Risks for being heavily short are elevated, but none of these commodities currently has a story worthy of sustaining a rally. The next best opportunity would be a hot dry April for Brazil’s winter (safrinha) corn crop IF that were to unfold, but that’s still an unknown.
