May 24 – Fear levels crept higher overnight as the impasse over the debt ceiling raises concerns amid the looming June 1st deadline. Today’s scheduled release of the minutes of the May Federal Reserve meeting adds additional intrigue to today’s markets. The VIX hit a nearly three-week high near 20 this morning, reflecting elevated fears, although there’s still no panic on Wall Street. The dollar index consolidated near 103.5 this morning, after hitting a fresh two-month high earlier in the session. Yields on 10-year Treasuries pulled back from yesterday’s two-month highs to trade near 3.69%, while yields on 2-year Treasuries did the same to trade near 4.29%. Crude oil prices continue to work higher following a Saudi warning to traders holding large short positions, with prices up another 2% to fresh three-week highs this morning. The grain and oilseed sector is mixed to weaker in early trade.
A lack of progress on the debt ceiling talks worries traders a bit more now each day that we move closer to the deadline, which Treasury Secretary Janet Yellen says is the first of June. Traders still expect a deal between the White House and House Republicans, but accidents happen when you remove margin from the equation, and that concerns traders. The stakes are high for the U.S. economy. The two sides are said to be close, but so far apart. Partisanship is at an all-time high in Washington, with the positions of the leadership reflecting that. The fact is, the leaders struggle to come to the middle, because their parties behind them are so far apart. President Reagan and House Speaker Tip O’Neil were far apart in their politics, but they didn’t let that stop them from socializing together regularly to maintain a relationship. That relationship is what allowed them to work out their differences to reach positive solutions for our country. That sense of relationship doesn’t exist today, which is why there’s a bit of nervousness creeping back onto Wall Street as the deadline approaches.
The minutes of the May Federal Open Market Committee meeting are scheduled for release this afternoon at 2 p.m. Eastern Time. Those minutes should provide insight into the thinking of individual members of the Fed’s policy committee as we look ahead to the next meeting in another three weeks. Fed fund futures are currently pricing in 30% odds that we see another rate hike at that meeting, reflecting comments from various Fed members in recent days suggesting that such is a possibility. That talk contributed to Treasury yields working higher to two-month highs in recent days. JP Morgan CEO Jamie Dimon warned this week that “everyone should be prepared for rates going higher from here. You should be prepared for 6 or 7 percent.” He warned that we could see more risks in the banking sector as a result. Keep in mind that we’ve never before seen the kind of stimulus injected into the economy like we saw during the pandemic – roughly $5 trillion of fiscal and $5 trillion of monetary stimulus. The Fed has the challenge of withdrawing as much of that stimulus as possible in an orderly manner, and it’s never been done before. These truly are unprecedented times. They don’t have any historical examples to pull from in making their decisions, which means that they’re going into this somewhat blindly as well.
The Zaporizhzhya Nuclear Power Plant (ZNPP) is Europe’s largest nuclear power plant located in southern Ukraine. It is currently under the control of Russian forces, while forcibly employing a small group of Ukrainian workers to sustain the plant, even as missiles periodically hit in close proximity. The plant lost all external power for several hours Monday, requiring backup generators to cool reactors to prevent a major radiation incident. It was the seventh time that the plant had been completely disconnected from the electrical grid since the Russian invasion 15 months ago. The plant only has one remaining external 750 kilovolt power line, which was disconnected at roughly 5:30 a.m. Monday morning for about five hours before being restored. The International Atomic Energy Agency (IAEA) Chief Rafael Mariano Grossi stated that the situation demonstrated “the highly vulnerable nuclear safety and security situation” at the plant that has come under shelling at times during the war. He went on to say, “We’re playing with fire. We must act now to avoid the very real danger of a nuclear accident in Europe, with its associated consequences for the public and the environment.” There are unconfirmed reports that Russian forces have placed charges on some of the reactors that could be detonated if they are forced to withdraw. This could have obvious catastrophic human implications, but such an event could also render a large area of highly productive agricultural land unproductive for decades, and that is the connection to the commodity sector that we’re following. Such an incident could be multiples of what we saw at Chernobyl in 1986.
Risk premium tied to the war has largely been removed from the grain and oilseed markets. The trade now reflects expectations that all will continue as it currently operates – the status quo. Global milling wheat supplies are tight, but adequate, with plenty of cheap Russian supplies still making it onto the market. Global corn and soybean supplies are expected to increase in the year ahead, with limited risks seen in the near-term as Brazil harvests record crops. The status quo is contentment until something changes, and that hasn’t happened yet, and it may not for some time.
