March 19 – Stock futures were mixed to firmer overnight, as traders wait for the Federal Reserve to update its monetary policy early this afternoon beneath the current cloud of tariff fears covering Wall Street. The VIX is trading near 22 again this morning, while the dollar index is trading near 103.5. Yields on 10-year Treasuries are trading near 4.28%, while yields on 2-year Treasuries are trading near 4.05%. Crude oil prices were lower overnight, but they erased most of those losses prior to the U.S. trade desks opening this morning. The grain and oilseed sector was mostly weaker this morning as well.
President Trump had a lengthy phone call with Russian President Putin on Tuesday, with some progress made toward peace, although there is more work to be done. Putin would not agree to the full U.S. proposed 30-day ceasefire, but he did agree to halt strikes against Ukraine’s energy infrastructure, on the condition that Ukraine do the same. It’s still unclear whether Ukraine will consider the compromise, although Ukraine President Zelenskiy indicated that they will consider it. It’s believed that Putin is buying time while his troops make advances in eastern Ukraine, while also seeking to complete the defeat of Ukrainian troops in the Kursk region of Russia. The two agreed that talks aimed at pushing for a broader peace plan will begin immediately, although it was not immediately clear if those talks would include Ukraine, or Europe for that matter. Both sides launched drone attacks on the other overnight, reflecting the fragility of the situation.
The Federal Open Market Committee is expected to complete two days of meetings today when it releases an updated monetary policy decision at 2 p.m. EDT, followed by a press conference with Fed Chair Jerome Powell 30 minutes later. The market is pricing in a near zero chance of a change in the Fed’s benchmark interest rate today. In fact, it doesn’t expect a rate cut until the June meeting with two total cuts expected by the end of the year. I remain wary of expecting any rate cuts this year, although one or two cuts do remain possible if the economy shows enough deterioration. However, the Fed is currently caught between signs of a stagnating economy and rising inflation expectations. It could further fuel those inflation fires if it cuts rates, but failing to do so may lead to more economic stagnation. In fact, a rate hike can’t be ruled out if those inflation fears start to materialize. As such, I believe that it will punt on the rate cut decision.
However, I do expect it to discuss its current pace of quantitative tightening or shrinking of the balance sheet. I have expected for some time that it would find itself in a position of needing to halt quantitative tightening at some point this year. That may come from a plan to continue to throttle it down, or possibly a complete halt, depending on the data that it is seeing. Treasury yields plummeted in the last half of February, with yields on 10-year Treasuries falling by more than 50 basis points from their February 12 high. The weakness came as investors worried that Trump’s tariffs would threaten a U.S. recession, while also seeking the relative safety of government securities amid the uncertainty. However, those yields are rebounding again, partially as the market gets “comfortable” with the tariff headlines, and partially as the Treasury market has to again find enough buyers for the government’s debt certificates. Slowing or halting quantitative tightening would make more Fed money available for buying those debt certificates. As such, the Fed may choose to pause or slow its quantitative tightening as soon as today, or it may outline a plan for doing so at a future meeting. My bias is that it will do so sooner rather than later.
Strong winds are again striking portions of the Plains winter wheat belt today, raising risks for the crop that has faced dryness and extreme cold this winter. The storm system is also bringing blizzard conditions to areas stretching from northern Kansas to Wisconsin, providing some much-needed moisture to the windbreaks that catch the snow in the region. The wheat market is currently the strength of the grain and oilseed sector. That doesn’t mean that it can’t be vulnerable to selloffs, but the current focus is on the risks to the Northern Hemisphere crop amid relatively tight supplies among the major exporting nations, excluding the United States. Weather risks are rising globally for corn as well, although it’s still a bit too early for those to be well defined by the market. However, gains there are currently limited by a fear about how much of a shift toward corn we may see when USDA publishes the results of its farmer planting intentions survey on March 31. Add to that the mounting uncertainty regarding tariffs as we approach April. Tensions seem to be mounting with Canada, suggesting that the 25% tariffs on its goods my move forward on April 2nd, while there’s still good reason to be optimistic about Mexico. However, the tariffs on China are expected to remain in place for some time, and more reciprocal tariffs will be announced on most other nations April 2nd. Add on top of that Trump’s proposed fees for Chinese built / flagged ships that could create challenges for the export market later this spring. As such, uncertainties abound for the commodity markets.
