August 1 – Stock futures were steady to higher overnight, as traders continue to digest yesterday’s developments from the Federal Reserve, while also monitoring rising tensions in the Middle East. In fact, we can also throw in earnings reports and tomorrow’s monthly jobs report as well, but the bottom line is that we enter another day with an optimistic, but cautious, tone on Wall Street. The VIX is trading near 16, while the dollar index is trading near 104.3, as it recaptures much of the previous session’s losses, much to the frustration of Chinese policymakers who are anxious to stimulate their economy. Yields on 10-year Treasuries are trading near 4.02%, as they slide to fresh six-month lows, while yields on 2-year Treasuries are trading near 4.25%, as they do the same. Crude oil is modestly higher as the market adds a bit more war premium to prices, while the grain and oilseed sector is again mixed.
The Federal Reserve performed as expected yesterday – nothing more and nothing less. The Fed made no changes to current policy, but it carefully changed the wording of its statement, and comments made during the following press conference, to leave the door open for a rate cut at the September meeting. Fed Chair Jerome Powell stopped short of saying that there would be a rate cut in September, stating that there is still much data to be released between now and then that could influence such a decision. However, he clearly understands the bent of Wall Street currently, and he did little to change that bent. Powell stated that the Fed remains quite committed to the 2% inflation mandate, but he also reiterated that the jobs sector is now well balanced, with downside risks if they wait too long to act. He said that he could see a wide range of scenarios ranging between no rate cuts and three rate cuts the rest of the calendar year. Wednesday’s Fed statement was again supported by a unanimous 12-0 vote, but we failed to get a better feel for member sentiment in the absence of a dot plot graphic at this meeting. That said, Powell admitted that the FOMC engaged in a real discussion about cutting its benchmark rate at this July meeting, but that the majority did not support doing so. He added that “the reduction of the policy could be on the table as soon as the next meeting in September.”
But rising geopolitical risks are at play as well. The risk of a broader regional war in the Middle East still may be below 50%, but they are probably higher now than they have been at any time in the past 50 years. That risk factor has overshadowed China demand concerns in the crude oil market. It’s even had an influence on the grain and oilseed markets, where managed money holds massive short positions. But we’ve also seen the beginnings of a flight to safety draw money into government securities, increasing demand for them, which is helping to absorb much of the increased supply currently, adding additional downward pressure to Treasury yields. The New York Times reports that Iran’s supreme leader ordered a direct retaliation strike on Israel following the assassination of Hamas’ leader in Tehran earlier this week. So we now have lower rates – the lowest in six months – due to the above two factors. Those lower rates are expected to provide stimulus to the economy. How much of that shows up in the data by the September meeting is the next question.
First time claims for unemployment benefits rose to 249K in the week ending July 27, up from 235K the previous week, and above analyst expectations of 236K. That pushed the four-week moving average to 238K claims, up from 235.5K the previous week. Continuing claims for the week ending July 20 rose 33K to 1.877 million, while the four-week moving average increased by 5,250 to 1.857 million. That would suggest an increase in workers released from their jobs. However, the Challenger job cut report showed corporate notices to potentially lay off workers totaled just 25,885 in July, down from 48,786 in June and a historically low number. Other related data released this morning indicated that non-farm productivity increased at an annualized rate of 2.3% in the second quarter, up from an upwardly revised 0.4% the previous month, and above analyst expectations of 1.6%. As a result, unit labor costs rose at an annualized rate of just 0.9% in the second quarter, down from a downwardly revised 3.8% in the first quarter and below analyst expectations of 1.9%.
Chinese policymakers were encouraged by yesterday’s Fed statement and press conference, as U.S. rate cuts would give them the cover they need to stimulate their economy. One of their plans reportedly is to solve the surplus of housing on the market that currently weighs on the property sector by moving 50 million rural people into cities over the next five years to create demand for those houses. The government will need to give them jobs with wages higher than they’re currently making, which will increase demand for consumer goods as well. Outside of that, we don’t see much fresh news to justify a turn in the commodity markets outside of managed money with large short positions growing increasingly nervous amid rising geopolitical risks.
