Perspective: Morning Commentary for June 28

By: Arlan Suderman, Chief Commodities Economist

Tue, 28 Jun 2022, 13:24

Perspective: Morning Commentary

Matt Zeller

Senior Market Intelligence Analyst

June 28 – Money flow is generally positive for both the commodities and for the equities in today’s early trade. Both sectors saw considerable liquidation due to economic concerns in recent days and weeks, so some consolidation is in order. Wall Street feels that the Federal Reserve may finally have a handle on what it needs to do to tame inflation, although it will remain a subject for debate whether the medicine is worse than the disease. Keep in mind that many traders on Wall Street are too young to remember significant inflation, or its detrimental impacts on the economy. But for this moment in time, there’s a bit of cautious optimism on Wall Street. The VIX is trading near 27 this morning, which is just above two plus week lows. The dollar index is trading firm near 104.2. Yields on 10-year Treasuries are trading near 3.22%. Crude oil prices are higher on renewed supply concerns, while the Ags are mostly solidly higher as well on bargain buying amid lingering inflation worries and supply concerns.

Fed Chair Jerome Powell admitted that the central bank was wrong about transitory inflation when he testified before Congress late last week. He also admitted that it will be difficult for the central bank to orchestrate a soft landing for the economy. Yet, he reiterated that inflation is enemy number one in the Fed’s playbook. That seemed to give comfort to Wall Street, fueling a bounce in stock prices, with money flow turning positive again for most of the commonly followed commodities as well. The medicine being dosed out to tame inflation is higher interest rates and a shrinking of the Fed’s balance sheet – withdrawing stimulus from the economy. Wall Street is worried that the Fed may raise interest rates too high, triggering a recession. But the fact is, you’d be hard-pressed to find a time when inflation was tamed with negative real interest rates. Interest rates need to be pushed above the rate of inflation to tame it, and the Fed is far behind the curve for doing so, suggesting that we could see strong inflation pressures for some time yet. The sad part of it is that the Fed is more aggressive in just about every other significant central bank in raising rates, so this is a global problem.

Yes, the medicine will inflict a degree of harm on the economy. That’s what it has to do in order to tame inflation, just as chemo treatments inflict harm on the body to tame cancer in the body. That’s why we want to start treating cancer early, so that less treatment is potentially needed. That’s why the Fed needed to act quicker to tame inflation, so that less medicine was needed. But that didn’t happen, and the inflation became well-engrained in the economy, spreading throughout it. So, is the medicine worse than the inflation? No, inflation is a serious disease that has serious longer-term consequences for the economy. It must be tamed at all costs, which is what led Paul Volker to drive interest rates toward 20% to quickly deal with it more than four decades ago. The problem is, we have a lack of leadership at both the fiscal and monetary policy level currently – individuals more interested in being seen as the kind doctor that tells us what we want to hear, rather than the truthful doctor that tells us what we need to hear.

China is reopening, following its recent round of Covid lockdowns, as described in today’s edition of China Direct, published by Ivy Li in our Shanghai office. It shortened its quarantine period for international travelers from 14 days at a centralized location and 7 days at home, to 7 days at a centralized quarantine center and 3 days at home. It’s reopening theme parks, restaurants, and stores, although the reopening is generally being phased in. People are still being cautious, not wanting to test positive, necessitating renewed quarantine restrictions. Nonetheless, consumer demand for energy, goods, and services is expected to ramp up again. This allows supply chains to function a bit better, but it also increases demand, helping to fuel inflation again.

USDA reported lower corn and soybean ratings again this week as weather takes its toll on the Midwest crops. Corn and soybean prices, along with wheat, plummeted last week as weather forecasts looked a bit more favorable. My corn yield model puts the U.S. corn crop at 177.2 bushels per acre, based on this week’s crop ratings, which is very close to USDA’s yield of 177 bpa. I don’t put a lot of confidence in late June yield models, but it does suggest that USDA’s current estimate is probably pretty close based on current conditions. But again, the key time for the corn crop weatherwise is July, while August is the critical month for soybeans. The latest long-range ECMWF European model run covering the period July 11 to August 11 shows normal to above-normal rainfall for Indiana, Ohio, and Michigan, while much of the rest of the Midwest and Plains crop belt has a dry bias, with the entire region expected to have above normal temperatures. Confidence in forecasts more than 10-days out is low, so take this with a grain of salt. But it does suggest that the models continue to pick up signals in the atmosphere that we could see problems for both the corn and soybean crops during this critical reproductive time. Does this mean that the market will automatically go into a bull run? Not necessarily. But it does suggest that the risks remain with us, and that they must be respected until we have a better handle on how weather patterns are going to play out for the critical reproductive period. A lot of news will move the markets in the days and weeks ahead, but weather through the next 45 days will be the primary factor shaping the longer-term balance sheet.

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August 5 – U.S. equities markets are on fire this week, with both the Dow Jones and S&P 500 setting new all-time highs yesterday with futures indicating further gains again today; the marketplace remains optimistic over a deal with Iran despite no evidence of such as of yet. Crude oil is working on a lower high and low today but remains slightly on the high side on the session, while the dollar is retreating back towards Monday’s nearly two-month low. The ten-year note is steady-to-lower this morning (though solidly lower so far this month) at 4.605%, while the VIX index continues to rebound into mid-week at almost a 17-point reading this morning.

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Matt ZellerTue, 04 Aug 2026, 12:43

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Mike CastleMon, 03 Aug 2026, 15:10

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