April 5 – Stock futures bounced modestly overnight, after reversing sharply lower on Thursday on rising geopolitical risks and on comments from Federal Reserve members that rate cuts may not be needed this year. There’s little need to cut rates if the economy is growing. Doing so just increases reinflation risks. However, the real focus today is on the monthly jobs report that once again came in hotter than expected, again reducing the odds of multiple rate cuts this year. Stock futures initially dropped on this morning’s jobs numbers, before recovering again on the realization that they reflect a solid economy. The VIX is trading near 16 at this hour, which is just below yesterday’s two-month high near 17. The dollar index is trading near 104.6 as it follows Treasury yields higher following the report. This comes after the dollar index posted two-week lows on Thursday. Yields on 10-year Treasuries are trading near 4.39%, which is just below Wednesday’s four-month highs, while yields on 2-year Treasuries are trading near 4.71%. The broader commodity sector posted modest gains overnight, with crude oil just below yesterday’s five-month highs, in which Brent pushed above $90 per barrel, while the grain and oilseed sector was mostly higher as well.
The economy created 303K non-farm payroll jobs in March, up from 270K in February and 50% more than the 200K anticipated by analysts prior to the report’s release. Furthermore, the unemployment rate ticked lower to 3.8% in March, when analysts expected it to remain unchanged at 3.9%. The unemployment rate has remained in a very tight range between 3.7 & 3.9% since August of last year. Today’s report indicates that there are 5.4 million people in this country who say they want a job, but they haven’t looked for a job over the past month, and that number has changed little, despite the nearly 9 million posted job openings revealed in the JOLTS report. The job participation rate moved up to 62.7%, up from analyst expectations that it would remain at 62.5%. Average hourly earnings rose 0.3% month-on-month, matching expectations, but up from an upwardly revised 0.2% the previous month. Average hourly earnings were up 4.1% year-on-year, matching expectations, but down from 4.3% the previous year. The average workweek ticked higher to 34.4 hours in March.
Healthcare added 72K jobs in March, which is above the monthly average of 60K over the past year. That essentially matches the 71K jobs added by government, which is above the monthly average of 54K, with most of those jobs being in local government. Construction added 39K jobs in March, which was double the typical pace. Employment in the leisure and hospitality industry added another 49K jobs in March, bringing it back up to pre-pandemic levels. Back revisions for January and February included upward adjustments of 27K jobs created for January and while February was revised downward by 5K jobs.
Good news is bad news on Wall Street, until it isn’t. The initial reaction is negative, because it means that the Fed is less likely to cut rates. But this is essentially the same story we’ve seen over the past year, and the market has continued to post new record highs as the feared recession never shows. I’m not saying that it won’t, as every economy goes through cycles, but it does show how much money is still in the system, and it shows an underlying confidence (whether right or wrong) that we’ll get fiscal and/or monetary stimulus to hold things up if problems emerge, as that’s been the recent pattern. All of this contributes to inflationary pressures, which is why I continue to expect reinflation to become more of a focus as we move into the middle and latter portions of this year.
Geopolitical risks are rising, adding concerns for fund managers holding short positions in the commodities. Ukraine claims it made a successful strike on a strategic Russia airfield, further escalating the risks of a counterattack by Russia. This comes on top of its recent strikes on Russian refineries, which continues to erode away Russia’s capacity to export product, and perhaps crude oil itself. Add to that the rising tensions in the Middle East after Israel took out key Iranian military leaders in a strike on the Iran consulate in Damascus, resulting in a promise of revenge from Iran. Israel is now bracing for that retaliation, as the risks of the war becoming more regional in nature rise, risking attacks on oil producing and exporting infrastructure.
There is nothing bullish about grain and oilseed fundamentals currently, but they continue to benefit from underlying support from the above factors. Historically, managed money has preferred to be long rather than short the commodities when inflation expectations are rising. It’s a little early for that, but the other rising geopolitical risks provide support for the time being. This is also the time of year when weather risks tend to increase for the grain and oilseeds, and of course, crude oil is adding war premium for both the Black Sea and the Red Sea regions. Meanwhile, Center-West Brazil is trending seasonally drier, but not as quickly as expected by the models. That reduces the scope of potential losses that we might see with Brazil’s winter-corn crop as it enters the critical pollination phase in the weeks ahead.
