September 26 – Stocks are stagnating with the economy this morning as traders worry about high interest rates and the effects of stagflation gaining a foothold in both Europe and in the United States, with a possible government shutdown this weekend adding to the concerns. The VIX is trading near 18 once again this morning, after setting a fresh five-week high there on Monday. The dollar index is trading near 106.0 at this hour, after setting a fresh 10-month high above 106.2 earlier in the session. Yields on 10-year Treasuries are trading near 4.52%, after setting a fresh 16-year high near 4.57% overnight, while yields on 2-year Treasuries are trading near 5.14%. Crude oil prices are mixed, while the grain and oilseed sector is mostly lower this morning.
Full funding of the U.S. government expires at midnight on September 30th unless Congress passes the necessary legislation to continue funding operations and acquires the president’s signature prior to then. At stake is an argument regarding the pace of government spending in Washington, and the desire of some in Congress to use this pressure point to force discipline in funding. Fitch lowered its rating on U.S. credit this summer due to the runaway spending in Congress, and the pattern established of continual debates that result in short-term spending bills and increased deficit spending over the past 20 years. The move sparked an immediate jump in interest rates. S&P lowered its credit rating back in 2011 during a similar budget battle. The current worry is that this debate will push Moody’s to lower its credit rating. It has already warned that “a shutdown would be credit negative for U.S. sovereign. In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.” Moody’s analyst William Foster told Reuters, “If there is not an effective fiscal policy response to try to offset those pressures … then the likelihood of that having an increasingly negative impact on the credit profile will be there. And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures are not addressed.”
The growing problem of U.S. debt has a significant impact on the commodity markets. I’m not going to address whether shutting down the government is the appropriate way to address the issue. But I will address the concern that Congress keeps spending more than it brings in because that’s what we the people keep electing them to do. We are a culture that wants what it wants when it wants it, and we will worry about paying for it at a later time. That “later time” is rapidly coming upon us. It currently costs the U.S. budget an estimated $708 billion per year for just the interest payments on our national debt, which is double where it was in the summer of 2022, and it is rapidly approaching the $795 billion that we spend annually on national defense and war. The Congressional Budget Office projects that the interest obligation will rise to $902 billion four years from now, while the Administration’s Office of Management and Budget projects that it will rise to $929 billion per year at that point. But those estimates are based on assumptions of lower rates going forward, and we’re seeing more evidence that will not be the case. Maintaining the current trend would result in the annual interest obligation to the national budget rising to nearly $3 trillion! The truth is likely somewhere in the middle, but the bottom line is that the interest payments alone on our national debt are about to flow up the fiscal budget.
Congress increasingly finds itself in a position of borrowing more money to not only pay for spending obligations, but also for paying the interest on existing debt. That increases the supply of debt obligations on the market. The market must attract enough buyers for those debt certificates at a time when the Federal Reserve, China and Japan are all reducing their purchases by roughly $1.3 trillion per year. Retail purchases of Treasuries are increasing but finding enough buyers to match the supply of debt certificates necessitates high enough yields to attract those buyers. The larger the supply of debt certificates, the more the market needs to work to attract enough buyers, apart from what the Fed does. That increases the cost of holding grain, resulting in larger carry premiums built into the deferred contracts to pay the cost of storage. Ultimately, that contributes to higher food inflation.
Corn ratings bumped higher this week, largely due to a big increase in Illinois, while soybean ratings slipped a bit lower again. Grain and oilseed prices are in a harvest malaise currently, with added pressure from a strong dollar and higher interest rates. Yet, wheat prices periodically find support from headlines of more attacks on Ukraine port facilities. Russia has yet to confirm rumors that Ukraine killed Moscow’s Black Sea Fleet Commander, but that is believed to be behind the current strikes against Ukraine. The market is largely growing immune to reports from the Ukraine war, and it will likely remain that way until / unless it believes that commodity shipments from Russia will be curtailed. Ukraine production does matter, but not in the near-term following two bumper crops from Russia. The day will likely come when it will matter to the markets, but that day is not today.
