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Perspective: Morning Commentary for June 18

By: Arlan Suderman, Chief Commodities Economist

Today's Perspective Video: China Soybean Rumors Return as Markets Rebound | Is Demand Finally Showing Up?

June 18 – Stock futures pushed higher early this morning as investors weighed prospects for the Strait of Hormuz reopening against a more hawkish Federal Reserve. The VIX remained slightly elevated near 17 this morning, although that is below yesterday’s high near 19. The dollar index however continues to push higher to fresh one-year highs near 100.7. Yields on 10-year Treasuries are trading near 4.45%, while yields on 2-year Treasuries are trading near 4.18%, after pushing to fresh 16-month highs on Wednesday. The yield curve continues to flatten amid rising inflation risks. Yet, WTI crude oil put in a fresh three-month low this morning near $74 per barrel. The grain and oilseed markets tried to push higher overnight, but then they came under pressure in the early morning hours today. The markets are closed for Juneteenth Day tomorrow.

First-time claims for unemployment benefits fell to 226K in the week ending June 13, down from 230K the previous week, but slightly above the average analyst estimate of 225K. The four-week moving average for claims rose to 223.25K, up from 219K the previous week. Continuing claims for the week ending June 6 rose by 24K to 1.810 million. The four-week moving average for continuing claims rose 9,750 to 1.795 million. All of these numbers are trending slowly higher in the near term, despite improvement in recent economic data, including stronger job creation. The numbers are not yet high, but the trend needs to be monitored.

Federal Reserve Chair Kevin Warsh held his first press conference in that role Wednesday afternoon, stating that the job market is solid and that the economy is doing well. However, he also acknowledged that the central bank had failed in its objective of keeping inflation at the 2% mandate for five years, and that the committee is united in its commitment to now make that happen. That united commitment showed through in the FOMC’s 12-0 vote to accept the policy statement. Unlike previous statements, this one was short and to the point. It ended with the statement, “The Committee will deliver price stability.”

Forward guidance disappeared from the statement, reflective of Warsh’s philosophy of the Fed drifting into the background in the future. Warsh leads with a philosophy that the Fed is successful when people aren’t talking about the Fed, which would be a sharp departure from what we’ve seen over the past 20 years. Participation in the dot plot graphic was optional under Warsh as well, since it’s been somewhat of an “embarrassment” in recent years. Yet, the dot plot graphic did show that half of the FOMC members expect at least one rate hike by the end of the year because they also forecast lower unemployment and higher inflation through the rest of the year. That combination shouldn’t have been a surprise to Wall Street, but it did become the focus on Wednesday afternoon, driving stocks lower, the dollar higher, and the VIX higher with it as well. The dollar remains strong this morning, along with the short end of the yield curve, while stocks have recovered. Even so, Warsh pointed out that he noticed that members filled out the dot plot with pencils with big erasers, telling him that he doesn’t think that members feel bound by yesterday’s dot plot, and that things could certainly change in the weeks ahead.

Warsh remains committed to the 2% mandate, but he’s not so worried about the decimal points to the right. His team will study if there are better ways of measuring inflation in today’s economy. But he also acknowledged that the Fed does not have the ability to directly control the price of “oil or beef or eggs or milk.” Rather, the Fed’s job is to make sure that price spikes in those sectors do not spread through the economy. I mentioned that the Fed will be studying the components of inflation in today’s economy. In fact, he’s setting up task forces to study a number of things, including how the Fed communicates, the quality of the data it uses, its use of the balance sheet, productivity, jobs, etc. The bottom line is that “there is a new sherif in town,” and he seems to have done a good job of getting the trust of other FOMC members in short order. Even Jerome Powell voted with him. We can expect a Fed that is more aggressive in trying new things but doing so in a way that is impactful to the markets because it will be more behind the scenes. I look for a Fed committed to leading from behind less, being out front of trends more, but seeking less attention in doing so in the process.

USDA’s flash reporting system confirmed that China bought 4.8 million bushels of new crop soybeans from the United States in the past 24 hours, with “unknown destinations” buying another 4.4 million bushels for delivery in the new crop year. That was on top of 11.2 million bushels of new crop corn purchased by Mexico. As anticipated, end users are taking advantage of the recent big price liquidation phase, which is what we’ve been seeing in the market this week. This signals the beginning of China coming in to purchase at least a portion of what it committed to for the coming year, although we won’t know if it lives up to the full commitment for quite some time yet.      

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Perspective: Morning Commentary for June 18

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