February 5 – Stock futures traded mixed to lower overnight as Treasury yields continue to push higher following last week’s hawkish Federal Reserve meeting on Wednesday, followed by a robust jobs report on Friday. The market is adjusting to the reality that the Fed may need to keep rates “high for longer,” as they’ve said for some time. The VIX is trading near 14 again this morning, while the dollar index trades to a seven-week high near 104.4. Yields on 10-year Treasuries are trading near 4.12% this morning, while yields on 2-year Treasuries are trading at one-month highs near 4.43%. The stronger dollar, combined with higher Treasury yields, continue to create headwinds for the broader commodity sector this morning, although losses in crude oil have been limited by rising geopolitical risks in the Middle East. Yet, the grain and oilseed sector remains under pressure from those factors that continue to keep “commodity deflation” as the central mantra amid the above developments.
The United States struck back at Iran-backed groups over the weekend, although it avoided a direct strike on Iran. It hit dozens of sites across portions of the Middle East in retaliation to the deaths of three U.S. service members killed recently in one of those Iranian backed attacks. U.S. officials indicate that more strikes are likely following more than two days of attacks on strategic locations in Yemen, Iraq, and Syria. The strategy currently being followed means hitting at military sites of these Iranian-backed groups that have hit our military posts nearly 170 times since the Gaza Strip war began on October 7. The debate is over whether we should be hitting at the source of these strikes in Iran, with political pressure mounting for such? Doing so might end things quicker, or they might quickly broaden the war in a way that starts to threaten crude oil production and/or infrastructure, while obviously also increasing the loss of life. One thing that history does tell us is that prolonged wars tend to increase overall losses and risks, as we’re currently seeing play out in the Black Sea Region. The increased risk provides support for energy prices, and indirectly for the grain and oilseeds that also have ties to the energy market, but as I explain below, that risk is currently being overshadowed by other factors in the eyes of managed money.
The bullish drum beat for the oilseeds the past several months was that Brazil’s weather problems would delay the soybean harvest there, extending the U.S. export season, while delaying the planting of the winter (safrinha) corn crop, raising risks for it as well. Risks remain elevated for the winter corn crop due to concerns that we could see an early end to the monsoon rains this year, but delays are not a factor currently. Survey data from our StoneX Brazil team revealed that 15% of Brazil’s soybeans had been harvested as of Friday, up from 10% a year ago and near the mid-point of progress of the past five years. In fact, one-third (33%) of Mato Grosso’s soybeans had been harvested as of Friday, up from 30% the previous year. That’s allowing soybeans to quickly move to the ports, with winter-corn planting rapidly advancing as well. Winter corn planting progress reached 20% as of Friday, up from 11% the previous year, and again, near the mid-point of progress over the past five years, with Mato Grosso winter corn planting at 25%, five points higher than the previous year’s pace. Perhaps we will see the feared delays develop in the weeks ahead, but thus far that is not the case.
Instead, “commodity deflation” remains the primary driving force on Wall Street, with fund managers maintaining large short positions across much of the sector. Rising Treasury yields currently are being seen as the Fed’s way of combatting sticky inflation, which in the fund managers’ playbook means to short commodities. I still believe that we will see that mantra flip later this year, but that’s not yet the case, and it probably won’t be until we get later into the year, unless we see a pop in inflation data. But I do believe that time will come. The Treasury Department is expected to offer more than $10 trillion in debt certificates onto the market this year. That will include a record $8.9 trillion in maturing debt certificates that will need to be rolled at today’s higher interest rates, along with an anticipated $1.4 trillion budget deficit for the current fiscal year that will also need to be financed with debt certificates. That adds up to more than one-third of the U.S. gross domestic product for the year that will have to be financed/refinanced this year at higher Treasury yields. This may prove to be a challenge at a time when foreigners are pulling back on purchases of U.S. Treasuries, while the Federal Reserve is also doing so to the tune of $1.14 trillion per year. I believe that the Fed will need to pull back on its quantitative tightening later this year to cap the growth of Treasury yields – especially on the long-end of the yield curve that hurts the housing sector – in this election year. That too is inflationary, as we go back to monetizing our debt.
