Perspective: Mid-Day Commentary for March 15

By: Arlan Suderman, Chief Commodities Economist

Wed, 15 Mar 2023, 16:08

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

March 15 - The major stock indices are notably lower, but near where they opened trade as traders fret the bank risk issues. The VIX is trading near 28, reflecting elevated fear on Wall Street. The dollar index is sharply higher near 105.0, creating strong headwinds for the commodity markets, with crude oil prices breaking chart support to trade 5% lower. Yields on 10-year Treasuries are trading near 3.41%, while yields on 2-year Treasuries are trading near 3.81% after making six-month lows. The livestock sector is also down on the strong dollar, with soybeans lower on weaker chart signals & weak crush data. Yet, corn and wheat prices are trying to go upstream with modest gains, with corn trading fresh demand following recent losses.

I have a bias. My bias is that the greater long-term threat to our economy is inflation that gets deeply engrained. That sets in motion a series of events that ends up creating a lot of long-term pain for everyone. The ultimate example of that is Argentina, where year-on-year inflation officially hit 100% this week. We are obviously no where close to that, but we don't want to get started down the path that risks taking us there. You can now take my comments within the context of that bias. Furthermore, perspective is helpful. Today's benchmark rate is just above 4.50% - the highest in 15 years. We've spent most of the 2000's below 5%. We spent most of the previous 35 years above 5%.

Rising interest rates do less to cause problems than they do to expose problems. In many cases, the answer is not more regulation, but rather more responsible decisions and management. Zero interest rates lead to a lot of mistakes that don't get exposed until those rates rise. Beyond that, fear can often times exasperate problems more than the facts themselves, and that likely is our greatest threat currently. That's why we see policymakers and regulators trying to act quickly to calm fears in the marketplace. The Federal Reseve added to problems when it kept rates too low for too long, and then talked only of transitory inflation that contributed to more bad decisions. The Fed has largely got it right over the past year - it just waited too long to get started. Remember, the Fed was still actively easing a year ago with rates near zero, even as inflation was on its way up.

The market expects the Fed to pivot to easy money policy as the regional banks face stresses. It may do so, but the market has been wrong for the past year. Fed fund futures at one point this morning put the larger odds on zero rate hikes at next week's meeting, although it is now trading 54% odds of a 25-basis point rate hike. The graphic below reflects Fed fund futures expectations of the benchmark rate being as much as 100 basis points lower by the end of the year. The market is assuming that things will become so bad in the months ahead that the Federal Reserve will have no choice but to slash interest rates. The Fed shrank back in early 1980, necessitating that it take rates to new highs at 22% by the end of the year. Fed Chair Jerome Powell has stated that he doesn't want to make that mistake again - he doesn't want to pull back too quickly. Yet, even if it's not the Fed's fault, he still must respect the risk presented of more regional bank failures. We've had over 500 bank failures since 2009, but Silicon Valley Bank was the largest since 2008, and the size of the banks struggling currently is the primary concern for Powell and for the markets. Retirement may be looking very attractive to Powell right now, considering the decisions he and the board face in the coming days.

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