June 10 – It’s Fed week on Wall Street, and this time it is also combined with inflation week. The Federal Open Market Committee will meet on Tuesday and Wednesday of this week to discuss possible changes to the central bank’s monetary policy. It will have the benefit of seeing the consumer price index inflation data on Wednesday morning before it completes its discussions, although the producer price index data will be released a day later. All of this comes in the wake of shocking election results in Europe that saw a significant swing toward a more populist political leaning that weakened German and French leadership in the European Union. Many stocks are trading near record levels as Wall Street digests these factors, leaving traders cautious as we start the week. The VIX is trading back above 13 this morning, while the dollar index is trading essentially at four-week highs near 105.3 as Treasury yields rise once again. Yields on 10-year Treasuries are trading near 4.46%, while yields on 2-year Treasuries are trading near 4.88%. Crude oil prices are nearly 1% higher, while the grain and oilseed sector is mixed in early trade, with wheat prices continuing their losses, while corn and soybeans try to bounce once again.
The European farmer protests that often blocked highways in protest of European trade policies, open borders and the Green movement should have provided insight into what was coming. European elections over the weekend saw a significant shift toward the right in the European Union, with German and French leaders both significantly weakened by the shift. It should be noted that the left maintained the majority in the European legislative branch, but the swing to the right was so significant that French President Emmanuel Macron rolled the dice to call for snap elections, trying to seize power back before the pendulum swings too far to the right that the left loses power. Both French and German bond yields surged in trading today as traders assessed the risks to the European agenda, while the euro lost ground versus the U.S. dollar. The shift to the right also raises concerns about how the European Union handles the war in Ukraine as well, adding one more geopolitical risk to a marketplace full of such risks in recent years. The U.S. dollar has struggled to break from its current high level of trading due to weakness in the euro. Europe’s current uncertainties will do little to allow the euro to regain the confidence of traders in the near-term, which may keep global investors focused on the confidence in the U.S. dollar.
Fed members will begin two days of meetings tomorrow with the purpose of considering whether changes are needed to its current monetary policy statement that is scheduled for release Wednesday afternoon. No interest rate changes are expected at this meeting, but Wall Street will be focused on potential shifts toward a more hawkish stance on the infamous dot plot graphic that reflects the thinking of the individual members of the policy committee. Wall Street anticipates that the mean position of those dots will reflect just one rate cut this year. I continue to argue that based on the metrics given to us by the Fed that we will not see a rate cut this year unless we see the economy make a much sharper downturn or we see the Fed succumb to political pressure. However, I will be watching in future meetings for mention of any more changes to the pace at which the Fed is reducing its balance sheet, after making a cut in the pace at the previous meeting.
Wheat prices continued to lose ground overnight as the Southern Plains harvest gains momentum. Yields in Oklahoma have generally impressed, coming in better-than-expected, albeit with lower than hoped protein content. The harvest should gain momentum in southern Kansas in the days ahead, quickly spreading across the wheat-state, adding cash sales onto the market. Additional pressure comes from a modest shift in the forecast that allows showers to provide relief for some parched portions of southern Russia and eastern Ukraine, benefiting both corn and wheat ground. The showers should erode areas under stress to one-third of Russia’s wheat belt, down from better than 50% currently.
The market also continues to digest the impact of Turkey’s decision to close its door to wheat imports from June 21 through at least October 15th. Turkey was expected to import 8.5 million metric tons of wheat this year, with roughly two thirds of that coming from Russia and much of the remainder coming from Ukraine. It’s longer-term average import total is closer to 9 mmt. Offsetting a third of that would be close to 3 mmt, with roughly 2 mmt of lost Russian exports and 1 mmt of lost Ukraine exports, rounding things off for ease of communication. Essentially, that lost export business offsets a portion of the lost production anticipated due to the drought and freeze in Russia this spring. Russia’s production may still fall by 15 mmt or more this year from initial estimates, so that’s still a story. But the lost Turkey business comes at the time of year when Russian exporters are trying to move the harvest, likely delaying when the market will deal with the tighter supplies. I mentioned above that we should see some showers in the region this week, but we’ll still need to watch developing risks for Black Sea corn production from the pattern.
