Perspective: Mid-Day Commentary for January 11

By: Arlan Suderman, Chief Commodities Economist

Tue, 11 Jan 2022, 18:17

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

January 11 - Inflation and rate hikes were the primary topics of conversation today, with stocks falling before turning higher midday. Today is slowly evolving more into a "risk-on" day for both the commodities and for the equities. The VIX is trading below 19 at midday. The dollar index is trading lower at one-week lows near 95.7, as yields on 10-year Treasuries stabilize near 1.76%, which is just below yesterday's one-year highs. Crude oil prices are up by roughly 4%, while the Ags are mixed to mostly higher as well.

The limiting factor for the Ags today is tomorrow's big set of USDA crop reports. The data dump from USDA tomorrow is the largest of the year, dramatically increasing the odds of surprises. Wheat prices surged today on chatter that USDA's winter wheat seedings report may surprise to the downside tomorrow, with fewer-than-expected acres being planted. Both corn and soybean prices traded both sides of unchanged as traders complete positioning for tomorrow's reports. A few small lots of cash cattle trade emerged near $137 per cwt on a live basis in both the northern and southern Plains feedlot areas, providing near-term support for the board. Yet, gains continue to be limited by slower chain speeds due to Omicron-driven worker shortages.

I cannot over-emphasize the importance of Fed monetary policy in shaping both the economy and the markets in 2022. We heard comments this morning from people at the Fed who have held very different positions in recent months, reflecting the different camps within the Federal Open Market Committee that sets policy. Kansas City Federal Reserve President Esther George pushed for a more aggressive approach to rate hikes and to shrinking the balance sheet - withdrawing stimulus from the economy. Federal Reserve Chair Jerome Powell took a much more measured approach, walking a fine line of supporting gradual rate hikes as we slowly expand the economy. Powell was a dove while trying to get renominated for another term at the helm of the Federal Reserve, but he needed to shift hawkish to get confirmed by a group of Senators hearing from their angry constituents about inflation. He is expected to sail through the confirmation process, but how will the Fed that he leads respond to the problem? That's the key question before the markets, and the key question for 2022. The minutes of the Fed meetings (released 3 weeks after the meetings) may become more enlightening, and entertaining, than the meetings themselves.

We'll get updated inflation data the next two days. Last month's reports put inflation at its highest level in nearly 40 years. Yet, the graphic below shows yields on 10-year Treasuries at nearly 40-year lows. The net result is negative returns from current interest rates. As such, we should continue to see money funneled into the equity and commodity markets until such time that institutional investors believe that monetary policy will push real rates into positive territory. Shrinking the balance sheet would help to do that in a more natural way, although the Fed has to be careful not to do it too quickly, which could create liquidity problems within the financial system while putting the brakes on economic growth. It's also an election year. Many polls show that voters feel good about their personal finances reflecting the amount of stimulus in the economy, but they feel very poorly about the health and future of the economy. They have the money to shop online (stimulus), but they're worried about all these troubling signs. They see inflation every time they buy groceries or fill up their car with gas. They see empty shelves at stores, and they face the mask debate every time they leave the house. That adds political pressure to the Fed to "fix things," but to do it right and to not mess this one up. This will be a challenging year for the Fed, and an important one for the markets.

Forty-year weekly chart of yields on 10-year Treasuries. SOURCE: Reuters Eikon

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