Perspective: Mid-Day Commentary for May 11

By: Arlan Suderman, Chief Commodities Economist

Wed, 11 May 2022, 16:06

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

May 11 - Today's markets have all been about money flow. Stocks firmed overnight, but then fell sharply when this morning's consumer inflation data was released for the month of April, only to rebound again as we moved through the morning. Keep in mind that we are scheduled to see inflation data at the producer level released tomorrow morning. The VIX popped a couple of points when the inflation data was released, leading to a pullback in overnight gains in the food and energy sectors, but then money quickly returned within minutes to push these assets higher.

The bottom line take away on Wall Street this morning is that inflation appears to be well-rooted into our economy, with appearances that it's going to be hanging around for awhile. Take that within the context of last week's Federal Reserve meeting and press conference with Fed Chair Jerome Powell. The Fed took more aggressive rate hikes off the table, while also phasing in its plan to shrink the balance sheet. The economy is still very juiced with stimulus, and will remain that way for some time. The stock market has already seen a large correction, although the tech sector action suggests that it still faces some risks. Otherwise, stocks will have the benefit of the Fed's candy jar a bit longer. Meanwhile, those hard assets (food and energy commodities) that have a good fundamental story are seen by portfolio managers as a way to protect their investments against the erosive effects of inflation. One of the patterns I've seen this year has been for high inflation numbers to initially result in increased buying in these sectors. One of the exceptions is when the VIX pops, reflecting a surge in fear that causes fund managers to pull back initially.

The VIX pulled back to trade near 31 at this hour as the markets settled down following the initial volatility seen after the inflation data was released. The dollar index surged following the inflation data release, but then pulled back to levels it traded prior to the release, with levels currently near 103.7. Yields on 10-year Treasuries are trading near 2.97%. Crude oil prices are up 5%, after trading to fresh two-week lows earlier in the session, with the Ags also finding a strong buy thus far today. Tomorrow's USDA WASDE report could be a disappointment for the Bulls, with USDA releasing its first 2022-23 balance sheets. It will likely be generous in its estimates of Ukraine production and exports. It will also be generous with winter wheat yields due to the late maturity, counting tillers rather than heads in some late developing areas. USDA should increase its soybean export target, tightening up old-crop stocks, but its new-crop balance sheets probably won't provide much fodder for the bulls. I wouldn't expect that it the May report, so I guess that's where surprises could come as well. I do believe that we will see increased prevent-plant acreage for both corn and spring wheat, but it will take some time for that to show up in the data. As for yields, USDA's history suggests that it will likely utilize the yields used in its February Outlook Forum of 181.0 bushels per acre for corn and 51.5 bpa for soybeans. The below graphic shows how yields changed from USDA's May estimate. The key beyond tomorrow's USDA WASDE report will shift back to planting delays and expectations of changes in the acreage mix as a result, followed by developing summer weather patterns.

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