May 5 – Stock futures turned lower overnight as investors position for Fed week, and following another tariff announcement from President Trump. The VIX is trading near 24 this morning, while the dollar index trades near 99.5. Yields on 10-year Treasuries are trading near 4.32%, while yields on 2-year Treasuries are trading near 3.81%. Crude oil prices are trading more than 1% lower this morning on economic worries, while the grain and oilseed sector is mostly lower as well on demand concerns.
The Federal Market Open Committee will meet on Tuesday and Wednesday this week to discuss monetary policy. These meeting always draw plenty of market attention, but investors will be even more locked in this time around. This is essentially the first meeting of the Fed post-tariffs. Yes, President Trump had implemented some of his tariffs prior to the March Fed meeting, and he had discussed the approaching reciprocal tariffs, but those reciprocal tariffs were far more widespread and stronger when applied than what was anticipated when the Fed met in March. We’ve seen a negative GDP print since that meeting, but we’ve also seen a solid monthly jobs report. As such, there is not a sense that this Fed has consensus on changing interest rates in this May meeting. The boardroom discussions are expected to be quite spirited, although we’ll not see the minutes of the meeting to learn about those discussions for several weeks. Nonetheless, investors will be reading the policy statement closely to discern changes in wording that might give some clues to the board’s leanings, while parsing every word coming from Fed Chair Jerome Powell when he takes questions from the press on Wednesday afternoon.
President Trump announced yesterday that he would put a 100% tariff on movies produced outside of the United States in what appears to be a move to support Hollywood – an industry that historically has been politically opposed to his policies. There is little clarity yet on how the tariffs would be implemented, but the announcement was seen as another escalation of the tariff battle that adds uncertainty to the markets. As such, President Trump needs to add some certainty by announcing new trade deals with major trading partners. Such trade deals typically take about a year and a half to develop, but Trump has just weeks to get some major deals done to reassure the markets. Ironically, stocks overall are trading near where they were when the reciprocal tariffs were announced, with the Nasdaq stock index moving above those levels last week. Nonetheless, that recovery came on hopes of progress, which will need to be validated in the days and weeks ahead.
Chinese exports surged in the first quarter ahead of the reciprocal tariffs as customers tried to build inventories here in the States. That created a short period of economic growth in China, while the inventory build in the United States actually contributed to negative GDP for the quarter, due to how gross domestic product is calculated, even though consumer buying through the period was good. Exports out of China to the United States have now slowed dramatically, resulting in some factories shutting down, while others curtail production. Massive layoffs have begun in China as the impact of the tariffs is felt, leading the government to create new jobs, while also spending money on retraining programs to equip workers for those new jobs. Here in the States, retailers are working their way through those inventories accumulated in the first quarter of the year. Smaller businesses with less capacity to build inventories will see supplies run out first, while larger “big box” stores will likely have supplies longer. Yet, the day is coming when we will see those shortages develop until / unless alternative suppliers can be arranged. Arrivals at the Port of Los Angeles are expected to be down by more than 35% year-on-year over the coming week as the flow of goods from China slows. That likely starts to impact what we see on the shelves of our favorite retailer by mid-June. That again is why President Trump needs to be able to start announcing solid trade deals with major trading partners to reassure consumers and businesses that his strategy will work in the end.
USDA will release one of its most significant WASDE crop reports of the year a week from today. It’s the highly anticipated May crop report that always includes the agency’s first domestic and global supply and demand balance sheets for the new marketing year – in this case the 2025-26 marketing year. First, we need to recognize that reaching trend yields this year could result in rising supplies of corn, soybeans, and wheat here in the United States, while just a 5% decline from trend would be expected to decrease supplies – especially for corn and soybeans – resulting possibly in the need to ration demand. The Southern Hemisphere crops are largely known now, so the focus is on the Northern Hemisphere crops. There are areas of concern, but nothing imminently threatening the crops at this point. We should see rapid planting progress in the Midwest over the next 10 days, followed by fresh chances for rain in the 11- 15-day period. Those rains will be important for sustaining production potential. The closest thing to a bullish story currently is the lingering hopes of a biofuel announcement from the EPA soon.
