The U.S. Federal Reserve's actions have undoubtedly had a significant impact on the economy with actions involving higher-for-longer interest rates to a reduced balance sheet – as the national debt continues to swell, posing a risk to credit markets.
To further understand the Fed’s monetary policy effects, StoneX’s Chief Commodities Economist, Arlan Suderman, dove into several economic indicators worth looking into: The latest CPI print and the monthly WASDE report from the U.S. Department of Agriculture.
Here’s what Suderman said he is watching closely, including the potential for a hot and humid Midwest and whether inflation will cool enough for the Fed to begin easing.
The Federal Reserve’s updated dot plot on June 12th pointed to a single rate cut of 25 basis points in 2024, quite a shift from forecasts released in March, where it projected three cuts.
With the U.S. national debt at levels exceeding $34 trillion and growing, the potential for problems in the credit market lingers.
“They (Fed officials) say the most likely next move will be a rate cut. There's nothing in the economy right now, pushing them to do a rate cut,” Suderman said, pointing to the latest last mile of bringing inflation down to the central bank’s target of 2%.
While one may think inflation will continue to cool, nothing is certain. There is also a risk of reinflation – as a strong U.S. dollar adds near-term headwinds alongside fiscal decisions from Capitol Hill and ongoing geopolitical tensions in the world.
“We’re seeing a lot of ebb and flow right now in this transition period between funds who think that inflation is coming back and those who think that it’s going to continue to trend lower,” Suderman said.
Weather forecasts driving varying market scenarios lie ahead for summer 2024.
One aspect worth paying close attention to is a stretch of heat expected to affect the waters surrounding the Gulf of Alaska, which would set up high pressure in the Southwest and lead to cluster storms across the Midwest.
There is not yet evidence of immunity to weather problems this summer, Suderman notes, adding that more clues are expected to come in the weeks ahead, such as the annual Acreage and quarterly Grain Stocks reports to be released on June 28.
The outlook for crops is mixed, having seen improved soil profiles despite dry pockets and raised yield estimates from the USDA amid production estimates for corn and wheat flat, while soybeans face slowing exports and buyer hesitation.
While monetary policy and weather are carefully monitored, additional factors are also under the spotlight, such as the Black Sea Grain Initiative amid the ongoing Russia-Ukraine conflict. Another issue closely followed is Brazil’s currency fluctuations as new tax laws are to be introduced to its economy.
Looking ahead to the July WASDE report and crop production numbers, Suderman notes the data would likely provide further clarity on the amount of lost production from Ukraine.
Overall, the theme of commodity deflation is “ebbing and flowing,” he said.
Stay ahead with StoneX’s Commodity & Economic Outlook by signing up for this webinar series or watching previous full episodes on-demand.
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Black Sea export revenue has collapsed and the pressure is landing on next season's winter wheat and rapeseed planting. Falling farm income, rising freight costs, Russian state support measures and European dryness now shape the acreage decision more than the war headlines do.
August 19 – Stock futures were quietly mixed for much of the night. Two wars continue to weigh on investor sentiment, but the economy continues to push forward. Treasury yields pulled back a bit overnight, but the trend remains higher. Yet, the VIX continues to trade near 15 this morning, which is a relatively low level reflecting a sense of complacency. The dollar index is trading near at an 11-week low near 99.0 as it slips lower in recent days, helping to offset a slow rise in commodity prices. Yields on 10-year Treasuries are trading near 4.64% after hitting fresh 19-month highs yesterday, while yields on 2-year Treasuries are trading near 4.17%. WTI crude oil is trading near $85, while Brent trades near $91 per barrel this morning.
August 18 – Stock futures continued to leak lower overnight amid escalating tensions on two war fronts, and as Treasury yields push higher. The VIX inched higher to trade near 16 as well, although that is still relatively low. Even so, it is firming. The dollar index is trading near 99.6 as investors assess Japan’s financial stability. Yields on 10-year Treasuries are trading near 4.74% at this hour, after posting a fresh 19-month high this morning, while yields on 2-year Treasuries are trading near 4.20%. WTI crude oil is trading near $85, while Brent trades near $91 per barrel. The grain and oilseed markets are firmer this morning, garnering support from solid demand, more yet unconfirmed reports of hits on grain boats in the Black Sea, and amid crop tour results that put some doubts on the size of this year’s crops.
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