October 19 – Stock futures inched higher this morning ahead of highly-anticipated comments from Federal Reserve Chair Jerome Powell at Noon Eastern Daylight Time today. Powell is scheduled to address the Economic Club of New York, while several other members of the Fed are also scheduled to speak today. Traders also continue to monitor headlines coming from the Middle East, where tensions continue to escalate. The VIX is trading near 19 this morning, after spiking above 20 overnight. The dollar index is trading near 106.3, down modestly from Wednesday’s close. Yields on 10-year Treasuries are trading near 4.94%, after spiking to a fresh 16-year high above 4.98% earlier this morning when the weekly jobless claims were initially released. Yields on 2-year Treasuries are trading near 5.22%, after spiking to a fresh 17-year high near 5.26% earlier this morning. Crude oil prices are roughly 1% lower this morning, while the grain and oilseed markets are mostly lower as well.
Fed fund futures are trading 97% odds this morning that the central bank will hold rates steady when they meet in two weeks, although the odds of another rate hike by January is currently near 50 – 50. But perhaps more significant is the fact that Wall Street seems to be finally believing the Fed’s promise to keep rates “higher for longer.” Traders are pulling back expectations for massive cuts in the Fed’s benchmark rate next week, while also very slowly starting to acknowledge that strength in the long end of the curve involves more than Fed monetary policy. In fact, that strength in the long end of the curve is doing much of the work of the Fed, as acknowledged in recent statements by members of the central bank. It will be interesting to see if Powell acknowledges that later today as well. There’s no doubt that the data remains troublesome for the Fed, which is focused on inflation in the “super core” sector – services minus shelter. Wage inflation remains a problem, and a tight labor market does little to change that, as illustrated in the latest monthly jobs report and in the weekly jobless claim reports.
First-time claims for unemployment benefits fell to 198K in the week ending October 14, down from 211K the previous week and below analyst expectations of 211K. That dropped the four-week moving average for claims to 205.75K, down from 206.75K the previous week. Continuing claims for the week ending October 7 rose by 29K to 1.734 million, while the four-week moving average rose by 19K to 1.694 million. That’s still a historically low number, but we’ve seen two weeks of solid gains for continuing claims, despite notable drops in the weekly numbers, sending mixed messages. Treasury yields spiked this morning when the headline weekly jobless claims numbers hit the wire, but then dropped just as quickly when the continuing claims number was reported shortly thereafter.
China concluded its two-day celebration of the 10-year anniversary of the Brick and Road Initiative today. There were three big take-aways from the summit, which was attended by Xi Jinping’s “good friend” Vladimir Putin of Russia. First, China outlined a vision to establish an economic corridor across the Eurasian continent linking China to west Asia toward Europe with railways and roads that will expand trade for China throughout the region. China hopes that this massive improvement in logistics will increase total trade in goods and services to more than $32 trillion and $5 trillion respectively in the next five years. Second, China will expand finance support for these BRI projects, while also inviting private participation. Some observers believe that substantial investment funds from the Middle East may also be available. Third, China seeks to double the number of scientific laboratories in the next five years that could help it make breakthroughs in technology that have been hampered by the West’s restrictions in recent years. We’re finding out how dependent China’s development has been on technology from the West in the past, and that assistance is being sharply curtailed currently. On a related note, China reduced its holdings of U.S. government debt certificates by $16.4 billion in August – the latest monthly data available. That means that it has reduced its holdings by $207.8 billion since March 2022 when the Federal Reserve began raising rates, although the pace of the liquidation seems to be increasing.
The energy of the grain and oilseed markets is currently in the soymeal market, with that strength spilling over into the value of soybeans. Gains are limited by forecasts that have turned much wetter for Center-West Brazil next week, which should allow this year’s soybean crop to get off to a good start if those rains verify. Meanwhile, corn and wheat prices continue to chop in a sideways pattern while traders monitor headlines from both the Black Sea and from the Middle East. An increase in Midwest rains next week are expected to slow harvest progress, which should slow the pace of farmer movement as well.
