September 7 – Wednesday’s Beige Book release by the Federal Reserve supported interest rates amid fears / expectations of “higher for longer” remaining the policy of the central bank a while longer, with the VIX trading above 15. Stock futures came under more pressure overnight, with the dollar trading at near six-month highs. Yields on 10-year Treasuries are trading near 4.30% this morning, while yields on 2-year Treasuries are trading near 5.03%. Crude oil prices pulled back from yesterday’s nearly nine-month highs, while the grain and oilseed sector was mixed to weaker.
First-time claims for unemployment benefits totaled 216K in the week ending September 2, down from 229K the previous week, and down from analyst expectations of 238K claims. That dropped the four-week moving average to 229.25K, down from 237.75K the previous week. Continuing claims for the week ending August 26 fell 40K to 1.679 million, with the four-week moving average dropping slightly to 1.702 million. These numbers continue to reflect a tight labor market that supports stronger wages, or in the Fed’s eyes, wage inflation that makes hitting its 2% inflation target difficult. These numbers fall on the side of arguing for another rate hike at some point.
Nonfarm Productivity rose at an annualized rate of 3.5% in the second quarter of this year, down from 3.7% in the initial report for the quarter, and down slightly from the 3.6% anticipated by analysts. However, unit labor costs rose at an annualized rate of 2.2% in the second quarter, up from the 1.6% gains originally reported for the quarter. Analysts had expected 1.7% gains. These numbers suggest that wage inflation pressures in the second quarter were a bit stronger than anticipated, which again reflects the strength of the jobs market.
The economy is slowing, but is it slowing enough to get inflation down to the Federal Reserve’s 2% mandate? That’s the question being considered by members of the Federal Open Market Committee ahead of their next meeting on September 19 & 20. Wednesday’s Beige Book provided an overview of the economy for policymakers to study ahead of their next meeting. It indicated that current U.S. economic growth is modest, with subdued job growth and slowing inflation in most areas of the country. However, the economy still remains more resilient than expected – perhaps too resilient to bring inflation down to the 2% mandate. The Fed has raised interest rates by 525 basis points over the past 18 months, slowing economic growth that has limited job expansion, but is it enough? That’s the question that policymakers will be debating behind closed doors.
The traditional doves on the board are getting nervous, wanting a pause to see if the current rates are good enough, with a possible pivot soon. The hawks are worried about pivoting too soon, as the Fed did in March of 1980. The Fed paid dearly for that mistake, necessitating a surge in rates by the end of the year that pushed toward 20%. Nothing like that is expected this time around, but Fed Chair Jerome Powell has made it clear on several occasions that he doesn’t want the board to pivot too soon under his watch. He would rather error on the “higher for longer” side of the fence than error on the side of pivoting too soon. Powell has done a masterful job of keeping votes of the FOMC unanimous. His job will get more difficult going forward. Monthly job growth averaged 150K per month over the past three months, which is down sharply from previous months, but still 50% higher than the 100K new workers entering the job force per month with normal population growth. Headline inflation is at 3.3%, down from 7% last summer, but still well above the Fed’s 2% mandate. The question is, has the Fed done enough to get inflation down to 2% amid the current stickiness of wage inflation, and at a time when the value of a basket of commodities is trending higher?
StoneX released the results of its latest customer survey Wednesday afternoon, pegging this year’s corn crop at 175.0 bushels per acre, and the soybean crop at 50.1 bpa. That’s toward the top of the estimates coming out ahead of next week’s USDA WASDE crop report, reflecting what our customers are seeing in the field. Keep in mind that I stated over a month ago that this would likely be a year with a wide range of variability in crop yields, and in fact the corn yields ahead of next week’s report have roughly a 10 bushel range to them. That’s an incredible range for September, but it’s really not a surprise. I stated that I expected the great variability because I felt seed size would be a major determining factor in the final yield. I did not expect at that time that August would be split – with the first half very mild and the second half extremely hot. Mild conditions tend to give larger-than-normal seed size resulting in surprisingly high yields, while heat combined with dryness tends to do the opposite. So how will this year turn out with August being split? My bias is that it will result in smaller seed size for both corn and soybeans, but we really won’t know until the harvest gets going. USDA’s field sampling should give us an idea of the trend, but I’ll have a lot more confidence in the October numbers when the crop has dried down.
