Perspective: Morning Commentary for March 22

By: Arlan Suderman, Chief Commodities Economist

Wed, 22 Mar 2023, 13:34

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

March 22 – Fed Day has arrived on Wall Street. Today’s focus will primarily be on this afternoon’s Federal Reserve policy statement, and on what is spoken during the press conference that follow’s the statement’s release. Stock futures were quietly mixed ahead of today’s Fed statement, while the broader commodity sector faced headwinds created by a mixture of Fed and banking worries. Commodity traders simply see the “glass as half empty” currently. Yet, the VIX traded near 21 this morning, reflecting modestly heightened levels of anxiety on Wall Street, but certainly few signs of panic. The dollar index traded to a fresh five-week low, as it currently sits near 103.1. Yields on 10-year Treasuries firmed to trade near 3.62% ahead of the Fed’s statement, while yields on 2-year Treasuries traded near 4.23%. Crude oil prices were quietly lower overnight, although they firmed this morning, while the grain and oilseed markets were mostly lower in overnight trade.

The Fed is on the hot seat today. It will no doubt be criticized no matter what it does, because it makes a nice scapegoat. The Fed has certainly made its share of mistakes in the past – most notably clinging to the “transitory inflation” theory for too long, resulting in being too slow to act. In fact, it was still pouring money into the economy with monetary stimulus 13 months ago as inflation was getting a foothold. One can rightfully debate whether its balance of interest rate hikes and balance sheet reductions was proper. We were in unprecedented territory, so it there wasn’t a clear roadmap for unwinding years of easy-money policy to the extent that we saw in the pandemic. Yet, the Fed now seems to grasp the job before it and it has thus far stayed the course, while trying to also speak with one clear voice in doing so. There are many voices out there giving advice to the Fed, most of which have a vested interest in their position. But in the end, it comes down to this. The Fed understands that it must stay the course to defeat inflation, but it also knows that it must respect the problem in the regional banking sector. There’s a lot of speculation about the scope of that problem, but the Fed is closest to knowing the extent of the problem. An overly aggressive hawkish stance at this point could create damaging contagion, while pulling back too much likely creates the need to become even more aggressively hawkish down the road. What the Fed says and does today will communicate to Wall Street its view of the health of the regional banking system, and that’s ultimately what the market will likely end up responding to in the hours and days following this afternoon’s statements.

China’s President Xi Jinping completed his three-day visit to Moscow with the signing of a series of bilateral agreements that will strengthen the tie between China and Russia. Several objectives were met with these agreements. First, trade volume is expected to significantly increase in the months and years ahead, with China now replacing Europe as the largest importer of energy from Russia, while the two countries continue to develop a pipeline for grain movement to China. Further growth is expected in crude oil, liquified natural gas, and coal movement from Russia to China, while Russia is expected to increase its purchases of Chinese electronics, cars, and other durable goods. Second, the two took steps to increase use of the yuan as the currency of trade between the two of them, as well as with other countries, displacing the dollar. The two countries moved toward splitting use of the yuan and the ruble 50-50 when completing trades last year. That will now move toward greater use of the yuan in transacting business. Third, China will increase investments in Russia under its Belt & Road Initiative, with a likely focus on Russia’s oil and gas industry, and its infrastructure. Ironically, there was little if any public mention of the Ukraine war in the discussions. Those comments remained in private between the two leaders. That may indicate that the two leaders have not yet found a common ground that would be attractive to the broader global community. As such, fighting remains intense within Ukraine.

The broader commodity sector remains under a cloud of recession fears. That cloud first built over the commodity sector roughly 11 months ago, and it has varied in its intensity. The clouds showed signs of parting earlier this year, but problems with Silicon Valley Bank and Signature Bank intensified the cloud once again. That means that all supply and demand fundamental news is viewed through a lens of skepticism about demand. That lens will change again one day, but the question of “when” remains. Crude oil leads the way down for the energy sector, while wheat leads the way down for the grain and oilseed sector. Wheat’s primary problem at this point is the large supply within Russia that continues to pressure global prices. Russia is expected to produce a smaller crop in 2023, but it will continue to have ample supplies carried over from last year, including supplies confiscated from Ukrainian territory. Corn supplies face the biggest challenges, followed by soybeans, but the trade’s not concerned about that now.

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