Perspective: Mid-Day Commentary for February 14

By: Arlan Suderman, Chief Commodities Economist

Fri, 14 Feb 2025, 16:20

Perspective: Mid-Day Commentary

Arlan Suderman

Chief Commodities Economist

February 14 - The S&P 500 stock index is on the cusp of possible fresh record highs as Washington remains roiled over President Trump's tariffs and federal employee layoffs. The VIX dipped below 15 this morning, reflecting a growing confidence on Wall Street, while the dollar index is trading to fresh nine-week lows near 106.6, providing additional tailwinds for the commodity sector. Yields on 10-year Treasuries are trading near 4.46% on ideas that Trump's reciprocal tariff plan may actually bring more countries to the negotiating table to increase trade at a lower cost, while yields on 2-year Treasuries are trading near 4.25%. Crude oil prices traded either side of unchanged this morning, while the grain and oilseed markets have been strong in today's trade thus far. The above factors provided tailwinds for the grain and oilseed sector this morning, which has been a lagging sector over the past year versus the rest of the commodities. Wheat garnered additional strength from adverse weather threatening the crop in both the United States and in Russia. Other support comes from reports that a Russian drone armed with a "high-explosive warhead" damaged a radiation shield over a portion of the old Chernobyl nuclear plant today, although no increased radiation levels have been reported thus far.

Inflation or no inflation, that is the question. We started talking about the risk of inflation returning back in September when the Federal Reserve cut its benchmark interest rate by 50 basis points, followed by two more 25-basis-point cuts to close out the year. We felt that too much fiscal stimulus remained in the economy to justify the stimulus that would come from the sharp interest rate cuts. We questioned theories stating that current interest rates at the time were highly restrictive in this fiscal stimulus atmosphere. We questioned theories that the "natural" interest rate was below 3%, considering the scope of stimulus still in the system.

Donald Trump's election win in November brought with it talk of tariffs. We've heard little else since then other than how tariffs cause inflation. And that can happen. However, it all comes down to how those tariffs are utilized and applied. For example, the tariffs applied in Trump 1.0 added between 0.1 and 0.3 percentage points to inflation. That's not much. To be fair, the tariffs being discussed in Trump 2.0 are more extensive than those in 1.0, but I think some perspective is still needed. Regardless, we see from the graphic below that commodity prices have correlated well with inflation expectations over the 10 years. The 10-year correlation between our StoneX Commodity Index Tracker and the 2-Year Breakeven Inflation Rate is 0.83, and there's some rationale to that correlation. Fund managers generally like to have ownership of the commodities when inflation expectations are rising to protect their portfolio from the eroding effects of inflation. They also tend to correlate inflation with healthy economies that consume more commodities. On the other hand, declining inflation rates are generally correlated with weakening economies that consume fewer commodities. We've seen inflation expectations for the next couple of years rise from around 1.5% in early fall to more than 3% currently, and with that, we've seen a rise in interest in owning commodities. That can change with the next headline, but that is what has brought us to this point.

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Grains & Oilseeds

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