Perspective: Morning Commentary for February 15

By: Arlan Suderman, Chief Commodities Economist

Tue, 15 Feb 2022, 14:30

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

February 15 – The markets continue to ride a roller coaster of emotions closely tied to geopolitical risks in Ukraine, with a touch of inflation. The pendulum currently leans toward a peaceful resolution in the Black Sea Region, although that could change with the firing of a single shot, while Wall Street digests more hot inflation data. The VIX is trading near 27 at this hour as tensions ease in Ukraine, and stocks recover some of their recent losses. The dollar index is trading near 96.0, after pushing to a nearly two-week high above 96.4 on Monday as a safe-haven asset. Yields on 10-year Treasuries are trading near 2.04% this morning, which is just below their two-year highs, following release of inflation data at the producer level. Crude oil prices are down more than 3% as the market removes some of the Russia / Ukraine risk premium, while also contemplating the possibility of a new Iranian nuclear deal. The Ags are also mostly lower in the broader commodity sell-off. Not every commodity is directly impacted by the geopolitical risks in Ukraine, but money flow has largely treated the sector as such.

Stock futures soared and commodity prices collapsed overnight amid reports that a) Ukraine may be willing to make concessions, and b) Russia began to pull back some troops currently stationed in Crimea. Thus, the decline in the VIX, reflecting easing anxiety levels on Wall Street as stock futures rallied. This fits the narrative well, that Putin had no intention of a full-scale invasion, but largely wanted concessions from the West, but it by no means is an indicator that the crisis is over. One will not be able to say that until the 130K Russian troops surrounding 70% of Ukraine’s borders have returned home, with Ukraine’s struggling democratic government still in place. For now, the sentiment is one of peace that we all hope will be maintained, but tensions remain very high in the region.

Inflation is hot at the producer level. The producer price index increased 1.0% month-on-month in January, doubling analyst expectations of 0.5%, and five times the 0.2% growth seen in December. The PPI increased 9.7% year-on-year in January, matching the pace in December, but beating analyst estimates of 9.2% growth. The core PPI that excludes the more volatile food and energy sectors rose a strong 0.8% month-on-month in January, beating analyst estimates that it would match the December rate of 0.5%. The core PPI was up 8.3% year-on-year in January, also matching the December rate, but above analyst expectations of 8.0%. The PPI that excludes food, energy, and trade services rose 0.9% month on month in January, and it rose 6.9% year-on -year.

Inflation at the producer level doesn’t always get passed in its entirety to the consumer, but it does suggest that significant factors remain in place to keep upward pressure on consumer inflation going forward, with those inflation forces having a broad base of support. In the end, inflation occurs when demand for goods and services is greater than the supply of those goods and services. Policymakers have largely focused on disruptions on the supply side of the equation without focusing on those factors creating elevated levels of demand. However, a small portion of the policymakers on the Federal Open Market Committee are starting to make noise about the contribution that unprecedented stimulus has had on elevating demand to create inflation. Afterall, that’s a big part of the reason why the stimulus was justified in the first place during the pandemic. Now some policymakers want to pretend like there’s no connection. I’m sure this is leading to some energetic debates inside the board room at the Federal Reserve.

The grain and oilseed sector continues to rise and fall with the latest headlines concerning the Russia / Ukraine crisis. This sector is trading geopolitical headlines as if no other fundamental factors are a concern for 2022, but that’s not surprising. The CONAB production estimate out of Brazil was supportive for soybeans, but it was the final data point of significance that we expected to see relative to the South American crops until we get to March. Yes, there continue to be many data points that we analysts can dig into, such as basis at the ports, harvest progress, safrinha corn planting progress, Argentine crop ratings, etc. But none of these are making headlines currently. That has allowed the money flow to focus on the geopolitical risks until more is known about the South American crops as we roll into the month of March. That’s when we’ll see another round of private soybean production estimates with sound harvest data behind them, and we’ll have a better handle on weather patterns for the final critical stages of crop development in Argentina, as well as the safrinha corn crop in Brazil. In fact, some safrinha corn was planted early enough in Brazil that we could see some harvest starting in May, although the bulk of the crop won’t be harvested until later in June and July. South American weather is still a factor, and high crop input prices, with some availability problems, are also a significant factor. But today’s focus is on geopolitical risks.

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