March 21 – Stocks continued their push higher overnight following yesterday’s enthusiastic response to the Federal Reserve’s apparent commitment to cut rates this year despite lingering inflation pressures. Stock futures are leaning positive again this morning, while the commodity sector is coming off its early gains. The VIX is trading below 13 for its first time in nearly six weeks, while the dollar index is trading near 103.6, after initially trading notably lower overnight. Yields on 10-year Treasuries are trading near 4.25%, while yields on 2-year Treasuries are trading near 4.61%. Crude oil prices are modestly weaker, while the grain and oilseed sector is in the green as well, albeit well off their session highs.
Will the real Jerome Powell please stand up? A resilient economy, sticky inflation, and a strong jobs picture provided solid reasons to keep interest rates “higher for longer” earlier this year. Those factors remain the case, but the Federal Reserve in a unanimous decision stated that it would stay the course with three rate cuts this year regardless. Perhaps it was bowing to pressure from lawmakers to cut rates in this election year, or perhaps it was a yielding of pressure from Wall Street to ease monetary policy. And maybe, it was simply the product of trying to maintain Powell’s apparent commitment to get a unanimous decision from his policymakers. Regardless, yesterday’s policy statement from the Federal Open Market Committee provided a pleasant surprise to Wall Street traders who were braced for the central bank to pare back expectations for rate cuts this year.
Stocks rallied and Treasury yields fell following the statement release on Wednesday afternoon, with the VIX falling to its lowest level since February 9. Yes, the Fed’s projections show the unemployment rate rising to just 4% by the end of the year, while increasing its projection gross domestic product growth this year to 2.1%, up from the Fed’s projection of 1.4% in December. It also bumped its inflation projection for the end of the year to 2.6%, while remaining committed to three rate cuts this year. Ironically, Powell was explicitly asked in the press conference Wednesday about his recent testimony to Congress in which he stated that the Fed was “not far” from gaining the confidence it needed to cut rates, but he sidestepped the question by saying that the Fed still needs more data to pivot policy. Put it altogether and it gives the appearance that Powell and the Fed are trying to win the favor of critics by saying they’re still on course for the three rate cuts this year, with three more likely next year, while still covering themselves if they end of having to do otherwise. They kept one foot on the dovish side of the stream, while keeping the other foot on the hawkish side. That is never a comfortable place to be, and it usually does not end well.
In the end, Wednesday’s surprise move by the Federal Reserve gives me even greater confidence in my projections for reinflation pressures to increase in the second and third quarter of this year. Wall Street’s reaction is expected to boost consumer confidence at a time in a week when we’re already seeing housing data showing demand increase in that sector. The Fed also indicated that it would soon be scaling back its program for reducing its balance sheet, which should ease concerns about possible tightening in the credit markets over the next few months. Increased consumer spending at a time when energy prices are also making new four-month highs continues to fall in line with my expectations since the fourth quarter of last year. I expect inflation expectations to gradually rise. History shows that managed money prefers to be long rather than short the commodity space during inflationary times. I do not believe that we are yet in that place in the commodities, but I do believe that fund managers will face that decision in the months ahead, which historically tended to impact the price level at which the market managed supply and demand.
Chinese imports of U.S. soybeans totaled just 4.96 million metric tons in January and February, down from 11.6 mmt the previous year. Meanwhile, imports of Brazilian soybeans during the period totaled 6.96 mmt, an increase of 4.7 mmt from the previous year, as Brazil continued to ship old-crop soybeans as it began harvest of its new crop, resulting in sharply lower demand for U.S. supplies. Chinese imports of U.S. soybeans fell by 10 mmt between October and February, compared to the previous year, resulting in a reduction of demand for U.S. soybeans equal to 367 million bushels, at a time when imports of Brazilian soybeans rose by 12 mmt or 441 million bushels. You can give a lot of reasons for the shift tied to rising geopolitical risks, but the bottom line was that Brazilian soybeans remain very price competitive as it rapidly increases its ability to produce in a cheap currency environment. That’s the new reality, necessitating that the U.S. industry continue to build new demand channels.
