January 28 – Monday’s big “risk-off” selloff produced a modest bounce overnight as the markets found firmer footing, at least for now. Stock futures posted a modest recover overnight, as did many of the commodities, but the VIX remains somewhat elevated from where it was last week, reflecting ongoing nervousness. The VIX is trading near 18 at this hour, while the dollar index is trading near 108.0 in a more significant bounce from yesterday’s nearly six-week lows. Yields on 10-year Treasuries are trading near 4.56% after holding at the psychological 4.5% level yesterday, but they left what has the appearance of a bearish head and shoulders formation on the chart. Yields on 2-year Treasuries are trading near 4.21%. Crude oil prices are trading 1% higher following yesterday’s sharp selloff, while the grain and oilseed sector is modestly firmer as well.
Durable goods orders fell 2.2% month-on-month in December, after falling 1.1% in November. That countered analyst expectations of 0.8% growth. Durable goods orders minus transportation rose 0.3% on the month in December, after declining 0.1% in November. Yet, that was still slower than the 0.4% growth expected by the trade. Core capital goods orders are seen as a measure of business sentiment. They rose 0.5% on the month in December, which is down a bit from the 0.7% growth seen in November, but still a reasonably healthy pace. In fact, core capital goods orders rose by more than the 0.3% pace expected by the trade. So today’s numbers had something for both the hawks and the doves. The headline number signaled some concerns, but much of that was due to declines in transportation orders, which can be volatile, and the core capital goods orders were solid. Nonetheless, we saw stock futures come under modest pressure on the data release.
The Federal Reserve begins two days of meetings this morning, which will conclude with the release of its revised monetary policy statement tomorrow at 2 p.m. Eastern Time, followed by a press conference with Fed Chair Jerome Powell 30 minutes later. Fed fund futures are trading 99% odds this morning that there will not be a change in the Fed’s benchmark interest rate tomorrow. The markets are prepared for the rate cut pause. The Fed previously communicated expectations of two rate cuts this year, so traders will be looking for indications on whether those expectations have changed. Fed fund futures still have that expectation priced into the market, but it’s not a given that we’ll have two cuts this year, or even one, or that we won’t have a rate hike. At this point, the expectation is that the Fed will merely pause while monitoring the decisions of the Trump Administration. Trump did not impose the anticipated tariffs on inauguration day, but many of those tariffs are still expected by Saturday of this week. We also still lack clarity on tax cut policy direction, although we’re already seeing considerable movement on deregulation, which should spur economic activity. The greatest challenge may be the Trump Administration’s efforts to cut fiscal spending / stimulus, but Elon Musk is already starting to walk back expectations on that. So, the expectation is that the Fed will fall back on its statement that they will “allow the data to drive them,” which means that they don’t know what to expect either.
The Fed is expected to turn its attention to a couple of other longer-term issues, according to StoneX Senior Advisor Jon Hilsenrath. The central bank is updating its framework for how it makes interest rate decisions, called the “Statement on Longer-Run Goals and Monetary Policy Strategy” that was last updated in 2020. It was that previous statement that included the assertion that officials were willing to let inflation run a little hot in the future if it continued to overshoot the Fed’s 2% mandate. It’s been doing so now for nearly four years. Look for policymakers to discuss altering that language in light of their inability to reach the mandate over that period of time into a statement that is less dovish than the current one. The other issue on the table will be the decision of when to stop shrinking the Fed’s portfolio of securities and other holdings. But first policymakers need to decide the desired composition of that portfolio. It is currently top heavy in long-term Treasury bonds and mortgage securities, and policymakers need to derive a plan for what it will look like long-term.
A lot of fund buying and farmer selling – in both North and South America – defined recent action in the grain and oilseed markets. Significant chart objectives have been reached for the corn and soybean markets. The U.S. farmer sold most of his soybean crop ahead of this rally, but he used it to clean up some additional sales. However, he’s sold most of the corn that he wants to sell ahead of summer, and many end users are booked with coverage through spring. Argentina cut export taxes, its dry areas are now limited to 25% of the belt, and the forecast suggests that those stresses will be reduced even further over the next two weeks. Wet areas of northern Brazil are drying out for the harvest of its big crop. The big question left for the bulls is, will there be a trade agreement with China that favors U.S. Ag commodities. If so, when will it happen, and what will be the scope of potential demand?
