June 22 – Both stocks and commodities came under pressure overnight, as traders returned to worrying about rising interest rates. That sentiment strengthened this morning after the Bank of England boosted its benchmark interest rate by 50 basis points, citing persistently sticky inflation as the reason. Yet, the VIX merely firmed to trade just below 14 this morning, up from yesterday’s three-year low near 13. The dollar index is trading near 102.2 at this hour, after reaching a new six-week low below 102.0 earlier in the session. Yields on 10-year Treasuries are trading near 3.77%, while yields on 2-year Treasuries are nearly 100 basis points higher at 4.75%. Crude oil prices are roughly 3% lower today on the rate hike fears and Chinese economic woes, while the grain and oilseed markets pulled notably lower on profit taking after the recent weather rally took prices into over-bought territory.
This morning’s BOE rate hike follows Federal Reserve Chair Jerome Powell’s hawkish comments before the House Financial Services Committee on Wednesday that suggested more rate hikes lie ahead beyond the 25-basis point rate hike expected by traders in July. Fed fund futures trading is now factoring in that anticipated July rate hike, with rates staying at that point through the end of the year, before dropping 150 basis points or so in 2024. The market is finally taking the Fed at its word that it will not begin rate cuts until next year, but now the question is, will it be able to do so then while still sticking to its 2% mandate? The market has consistently under-estimated the Fed’s commitment to the 2% mandate, and the Fed has consistently under-estimated the stickiness of this round of inflation that continues to be fueled by an unprecedented amount of stimulus still in the system.
First-time claims for unemployment benefits remained flat at 264K in the week ending June 17, up from analyst expectations of 261K. Yet, the four-week moving average rose to 255.75K claims, up from 247.25K the previous week. But continuing claims for the week ending June 10 fell 13K to 1.759 million, with the four-week moving average falling by 7,500 to 1.772 million. These numbers remain reflective of a tight jobs market. The Federal Reserve has repeatedly stated that wage inflation remains their primary concern, and that wage inflation will not be tamed until we see a better balance between the number of workers seeking a job versus the number of job openings. There are only two ways to bring those two factors into balance – increase the supply of workers or slow the economy to decrease the number of job openings. The Fed only has the tools to do the latter, and much more work needs to be done before the objectives is reached.
The Chicago Fed national activity index is a monthly index compiled from 85 existing monthly indicators of national economic activity constructed to have an average value of zero when the economy is growing at a trend rate, with a standard deviation of one. The index fell to -0.15 in May, suggesting that the economy grew at a slower than trend pace during the month. That’s down from analyst expectations of 0.08, and down from 0.14 the previous month. The bottom line is that the Fed’s current monetary policy stance is slowing the economy, but it has not yet done so sufficiently to have a notable impact on the labor sector, where inflation remains quite sticky. The BOE surprised the markets this morning with a 50-basis-point rate hike for similar reasons. Will the Fed need to do the same at some point?
Russia will withdraw from the Black Sea grain initiative in July, according to Ukraine’s Ambassador of the Ministry of Foreign Affairs Olga Trofimtseva. She cites two key factors leading to Russia pulling out of the agreement. First was the re-election of Russian President Putin’s friend Recep Erdogan as Turkey’s president. The second factor is Russia’s completion of the ammonia export terminal that allows exports without using the Tolyatti-Odessa pipeline that passes through Ukraine. Correspondingly, Yurii Shchuklin of the logistics committee of the European Business Association expects Ukraine exports to be slashed in half for the 2023-24 marketing year due to the expected collapse of the grain initiative, the European embargo on Ukrainian products moving into Eastern Europe over land, and adaptation of producer to the economic shocks of the first year of the war.
Grain and oilseed prices fell notably overnight as traders took profits from the recent upward explosion in prices due to deteriorating crop conditions as rains fail in the central Midwest. The forecasts remain the same, with promising rains in the 6- to 10-day forecast that fail to move forward into the 1- to 5-day outlook. The Drought Monitor again expanded the area under drought in the Midwest as those rains continue to fail. Speculative funds have no reason to be short corn and soybeans as long as the crops are deteriorating, but recent profits are too tempting to leave on the table when the market is so over-bought. Big losses continued following a daily limit down in soyoil yesterday after the EPA disappointed the market when it released its RVO requirements for the next three years. Our edible oils team has been conservative in its outlook all along, so it sees little need to downgrade its use projections going forward, and it anticipates that the industry will over-produce the EPA standards once things settle down.
