Perspective: Mid-Day Commentary for May 5

By: Arlan Suderman, Chief Commodities Economist

Fri, 05 May 2023, 15:11

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

May 5 - Upbeat Apple earnings provide a lift on Wall Street, contributing to a modest "risk-on" day on the Street. The VIX is trading below 18, reflecting calm across Wall Street as we head into the weekend, lacking any fresh significant headlines from the banking sector to add to this week's worries. The dollar index is trading near 101.4, while yields on 10-year Treasuries are trading near 3.45%. Crude oil prices are trading 4% higher, and nearly $8 off yesterday's lows. The grain and oilseed sector is strong today as well, led by rising geopolitical risks in the Black Sea region that threaten food supplies in a world when supplies overall are still tight. As such, Kansas City wheat leads the way higher, as it has the strongest story currently, with very poor growing conditions in much of the Plains, arguing for another short crop this year, which will likely be confirmed by next Friday's USDA WASDE crop report. Soybeans will likely see tighter old-crop stocks as well, and corn is along for the ride, as blockage of shipments out of Ukraine would also tighten its supplies in the world. It's generally a positive money flow day thus far, at least until the next headline strikes from the banking sector to send money to the sidelines once again.

This morning's jobs report combines with many other recent reports to argue for continued rate hiking by the Federal Reserve, but there's a legitimate debate about whether that will be necessary. It's true that there is still a lot of money in the system that could quickly bring a resurgence of inflation back to this country. It's also true that wage inflation is still a big part of that equation, as shown by this morning's jobs report. However, Fed Chair Jerome Powell referred this week to the central bank's survey of bank loan officers. That survey found that many banks are tightening their requirements for loans. The graphic below shows a sharp rise in the percent of banks tightening standards for loans to large and middle-market firms, but similar trends are seen for loans to small firms, as well as auto loans and new credit card approvals. There may still be a lot of money in the system, but this rapidly changing trend toward tightening access to that money is expected to do some of the work of slowing the economy for the Federal Reserve. The primary question is, will it do enough of the work, or will it even possibly do too much of the work? That's the current debate in policy circles, as well as on Wall Street.

Wall Street is upbeat today. Apple's earnings report was good, as have been a number of the reports. Wall Street has already priced many of these risks into the market, and it is choosing thus far today to end the week on an optimistic note, with money generally flowing into both stocks and commodities. However, this week's events continue to provide a reminder that both stocks and commodities remain quite vulnerable to headline risk. As for the commodities, I continue to see crude oil as the lead commodity telling me when fund managers shift from economic concerns to supply concerns, with implications for much of the rest of the commodity sector as well.

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