Perspective: Mid-Day Commentary for January 28

By: Arlan Suderman, Chief Commodities Economist

Tue, 28 Jan 2025, 18:00

Perspective: Mid-Day Commentary

Arlan Suderman

Chief Commodities Economist

January 28 - It's been a "bounce back" day in the markets today, including both stock and commodity prices. The tech sector took a blow Monday from the DeepSeek story, recovering a little more than half of yesterday's losses. The rest of the market is reacting positively to indications that the Trump Administration is taking a more measured approach to its tariff policy, seeking to start with a 2.5% initial universal tariff that ratchets up month by month, rather than an initial 10% tariff. We continue to face a Saturday deadline for potential 25% tariffs on Canada and Mexico, as well as 10% tariffs on China, based on the flow of drugs and migrants across our border, so the markets remain susceptible to headline surprises in either direction going forward. Furthermore, the Federal Reserve will conclude two days of policy meetings early tomorrow afternoon, releasing a statement that also has the potential to impact the markets.

Stocks pushed higher today, with the scope of the strength based on yesterday's performance. Those asset classes that saw the biggest losses on Monday generally tended to see the best recovery strength today. The VIX slipped below 17 late morning, while the dollar index is stronger today near 108.0. Yields on 10-year Treasuries are trading near 4.57%, while yields on 2-year Treasuries are trading near 4.22%. Crude oil prices started the day with solid gains, but those gains slowly whittled away with prices trading mixed at midday. The grain and oilseed sector is mostly higher, although the soybean complex is starting to slip into the red at midday. Harvest activity is picking up in Brazil, and we're also seeing bids become more competitive in Argentina, now that its export tax has been reduced, making it more difficult for U.S. soybeans and products to compete on the global market.

The commodity sector has had a good month overall, although energy prices have come well off their mid-month highs. Our StoneX basket of 27 commodities gained 6.5% over the past month, led by 10.2% gains in energy, although those gains were obviously much stronger mid-January. The softs and industrial metals saw less than 2% gains, while the grain and oilseed sector rose by 4.5%. The graphic below shows that commodity prices rose with inflation expectations - in this case the 2-Year Breakeven Inflation Rate that reflects market expectations of what inflation will do over the next couple of years. Note that inflation expectations over the next couple of years have risen roughly 150 basis points in recent months, similar to what they did a year ago. The 10-year correlation between the 2-Year Breakeven Inflation Rate and the StoneX commodity tracker is 0.83. Anything over 0.70 is considered statistically significant. I've previously written about how the commodity sector found some footing in 2024 after seeing significant losses in 2023. The lone exception was the grain and oilseed sector, which continues to show year-on-year losses of 6.9%, although that's much better than what we've seen for much of the past two years. Precious metals continue to see the best 12-month gains at 32.1% growth, while the overall basket of commodities has 12-month gains of 10.4%. A lot of factors go into where we go from here, including the Trump tariff policies, but inflation expectations certainly appear to be one of the factors at play, with those expectations currently pointing upward. That said, these markets will continue to be quite sensitive to the headlines coming out of the Trump Administration seven days per week.

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