Perspective: Mid-Day Commentary for March 7

By: Arlan Suderman, Chief Commodities Economist

Tue, 07 Mar 2023, 17:28

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

March 7 - Headlines are driving the markets today, with those headlines focused on the testimony of Federal Reserve Chair Jerome Powell before the Senate Banking Committee. Those comments drove stocks lower, with the dollar and Treasury yields rising, reflecting expectations that interest rates will be rising higher and longer than the market previously anticipated. The VIX remains near 19 though, suggesting little in the way of panic on Wall Street. The dollar index rallied sharply this morning to trade near 105.4 at this hour, as it makes new two-month highs. Yields on 10-year Treasuries are trading near 3.95%, as they continue to struggle to sustain a move above 4%, while yields on 2-year Treasuries are pushing to fresh 15-year highs near 4.96%. That puts the inverse spread above 100 basis points, reflecting the market's expectations for recession. Crude oil prices are down nearly 3%, after again failing to successfully hold a move above the 100-day moving average, while the grain and oilseed markets are mixed to lower, with the broader commodity sector under pressure as the dollar surges higher.

Jerome Powell made clear that the Fed has more work to do to tame inflation. Powell indicated that it may be necessary to ratchet the pace of rate hikes higher again, and that those rates may need to go higher than even it previously believed, and its expectations have been higher than the market for much of the past year. Powell noted that economic data came in stronger than expected since the latest meeting of the Federal Open Meeting Committee, and that the central bank is prepared to increase the pace of rate hikes "if the totality of the data were to indicate that faster tightening is warranted." The Fed's next policy meeting is scheduled for March 21 & 22. Policymakers will be quite interested in Friday's jobs report, as well as updated inflation data that is due to be released ahead of that next Fed meeting. Fed fund futures quickly priced in expectations of a possible faster rate hike. Fed fund futures had been fully expecting a 25-basis point rate hike at the next meeting, but that went up to 63% odds of a 50-basis point rate hike at the next meeting following Powell's comments. Wall Street is now pricing in the possibility that peak rates will top 6% at some point this year, with rates remaining high into next year. Inflation in the shelter sector is expected to start easing mid-year, but inflation in the service sector is expected to remain strong until wage inflation cools, and the jobs market remains very tight.

Powell's comments set the tone for both the commodities and the equities this morning. He will again testify before the House Financial Services Committee tomorrow morning, but his comments aren't expected to deviate too much from today's comments. However, we will see the JOLTS job openings report and the ADP private sector jobs report tomorrow morning, which could also create some headline risk. Otherwise, look for grain and oilseed traders to focus on USDA's monthly WASDE crop report tomorrow. The report is expected to be a quiet one, other than the expectation that USDA will slash 4.4 million metric tons off its Argentine soybean production estimate and another 3.6 mmt off the corn crop as this growing season now becomes the hottest and driest on record for Argentina. Adjustments to Brazil's corn and soybean production estimates are expected to be relatively minor, but they both should be record large crops. We may see a modest downward adjustment to U.S. corn exports, but the trade doesn't otherwise expect too many changes in the domestic balance sheets tomorrow - at least that's what's been priced into the market.

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