Perspective: Mid-Day Commentary for May 23

By: Arlan Suderman, Chief Commodities Economist

Thu, 23 May 2024, 16:37

Perspective: Mid-Day Commentary

Arlan Suderman

Chief Commodities Economist

May 23 - Mixed signals sent the tech sector to new record highs, while the Down pulled back. Nvidia's blow-out earnings report lifted the Nasdaq, while the Dow Jones Industrial Average fell as Treasury yields rallied on surprisingly strong purchasing managers survey data that continues to support the Federal Reserve's "higher for longer" policy on interest rates. The VIX is still trading below 12 at midday, while the dollar index is trading near 104.9. Yields on 10-year Treasuries are trading at nine-day highs near 4.48%, while yields on 2-year Treasuries are trading near at three-week highs near 4.94%. Crude oil prices trended lower with the stronger dollar and higher Treasury yields, while the grain and oilseed markets remain mixed.

July soybeans probed above the pivotal $12.50 level this morning, reaching as high as $12.58 per bushel at one point. However, buying dried up at that point as selling increased. The Brazil farmer still has plenty of soybeans to sell on this rally. There's also uneasiness over China's military blockade around Taiwan as we head into a three-day holiday weekend for the markets. Couple that with disappointing export sales demand, and it's difficult to justify a rally ahead of the weekend. Corn and wheat prices continue to find modest tailwinds providing underlying support, although traders there too appear reluctant to be overly aggressive with their buying ahead of the holiday weekend. The Black Sea wheat story continues to be the most intriguing, with forecasters calling for warm dry conditions to extend the areas under stress to more than 50% of Russia's wheat and 75% of Ukraine's wheat by early June, which begins the critical month of development for the crop.

The flash results for the latest purchasing managers survey produced a manufacturing index of 50.9 for May, up from 49.9 the previous month, and above analyst expectations of 50.0. The services index came in at a strong 54.8, up from 51.3 the previous month, and above analyst expectations of 51.4. Combining the two into the Composite PMI index produced a score of 54.4, up from 51.3 in April. A number above 50 indicates month-on-month growth. These numbers suggest renewed optimism among purchasing managers, especially in the service sector. However, it is noteworthy to see strength developing in the manufacturing sector as well. This combines with the decline in this morning's weekly jobless claims to suggest that the Federal Reserve will not be able to cut rates any time soon.

Instead, we continue to see worrisome signs of underlying reinflation pressures in the economy - or at least the failure to make appreciable progress toward the 2% mandated target. The below graphic shows that this year's reinflation pressure coincided with a resurgence in the US monetary base, which is a measure of money in bank reserves and in circulation. The increase comes despite ongoing reduction of the Fed's balance sheet, which suggests that we're seeing a rise in the base due to ongoing fiscal stimulus, including student loan forgiveness. Coincidentally, the Fed's "super core CPI" that it emphasizes is approaching 5%, as it has also trended higher along the same time span as we see the increase in monetary base below. However, much of the strength in the super core CPI is tied to rising auto insurance rates and to hospital services, which Fed policy has very little impact on. There are also signs that we could see a resurgence in shelter costs, which are impacted by Fed policy, as we continue to deal with a shortage of housing in this country.

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