Perspective: Morning Commentary for March 23

By: Arlan Suderman, Chief Commodities Economist

Thu, 23 Mar 2023, 13:36

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

March 23 – Stocks sold off during Wednesday’s press conference following the release of the Federal Reserve’s updated policy statement, but stock futures firmed overnight as traders digested the totality of what was said, with the VIX trading near 21 this morning. The dollar is trading near 102.3 this morning, after falling to a near seven-week low near 101.9 earlier in the session. Yields on 10-year Treasuries are trading near 3.47%, while yields on 2-year Treasuries are trading near 3.92%, as the inverse continues to narrow. Crude oil prices are modestly higher, while the grain and oilseed prices also firmed overnight, after another sell-off day on Wednesday.

Jerome Powell did his job, for the most part. The Federal Reserve Chair kept his policy board on the same page, communicating the essentials while speaking with confidence regarding the economy and the banking sector. Wall Street didn’t like his talk of lingering inflation, but there was really nothing new in his comments to either raise fears regarding future rate hikes, or to spur panic regarding the health – or lack thereof – of the regional banking system. The Federal Open Market Committee’s official statement replaced words stating that inflation “has eased” with words stating that inflation “remains elevated.” Powell spoke of the need to stay the course, but also said that the Fed was likely near a pause for the health of the banking system. The Fed’s dot plot graphic reflected expectations of at least one more rate hike this year, followed by up to three reductions in 2024, while Powell indicated that there was currently no support on the committee for cutting rates this year. In fact, the Fed’s statement replaced “ongoing increases may be appropriate” with “some additional policy firming may be appropriate.” Right or wrong, the market interpreted that change in wording as being dovish. Powell clarified in his comments to the press that the change in wording was due to the uncertainty currently in banking, as he acknowledged stresses in that sector. The FOMC will maintain the pace of shrinking its balance sheet or reducing the amount of lingering stimulus in the economy.

Powell’s intention seemed to be to communicate that the committee remains unanimous in its determination to bring inflation down to the 2% mandated level, and that it will stay the course until that job is done – meaning rates remaining higher for longer with no downturn until at least 2024. What the market heard was, we’re close to a pivot, as traders quickly priced in expectations of at least 100 basis points of rate reductions by the end of the current year. This keeps this tension between the markets and the FOMC in place, but it doesn’t add any fresh uncertainty. Powell did express concern that “serious problems at a small number of banks …. if left unaddressed can undermine confidence in healthy banks.” But his central focus continued to be on the need to contain inflation. He emphasized that “inflation is too high, and the labor market is too tight.” He went on to say that “the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy.” But one of Powell’s key statements is “Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.” Without saying it directly, that is the intent of the Fed. It has to slow down the economy to reduce hiring to bring the number of workers seeking jobs into balance with the number of job openings to tame wage inflation if it is going to bring overall inflation down to its 2% target, and that involves inflicting pain on all of us.

China’s President Xi Jinping now shifts his focus to another BRIC nation – Brazil. He will meet with Brazil President Luiz Inacio Lula da Silva next week, after spending several days with Russian President Vladimir Putin this week. The Brazilian president will bring along 240 business representatives, including 90 from the agricultural sector. Observers expect China to strengthen its commitment to import meat and grain from Brazil as it moves away from dependency on the United States. Look for Xi Jinping to also do what he can to move Brazil toward adoption of the yuan as the currency of trade, while also making more commitments to Brazil’s infrastructure as part of China’s Belt & Road Initiative. China is rapidly moving away from its need to depend on agricultural trade with the United States, while it has yet to reduce its dependency on the exports of consumer goods to the United States. However, the United States is addressing that issue, as it moves to onshore an increasing share of the production of consumer goods, while also reshoring the production of other goods to other non-China countries, with similar patterns seen in Europe. In fact, China has a growing problem with a congestion of empty containers clogging its ports. China is trying to downplay the problem as one of logistics, but the mass of empty containers suggest that its manufacturing sector has some significant challenges due to reduced exports to the United States and Europe. China’s economy is grounded in the export and property sectors, and neither is doing well currently.

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