December 19 – Stock futures pushed quietly higher overnight amid continued optimism regarding the U.S. economy, with the VIX trading just above 12, while the dollar index slips lower to trade near 102.3. Yields on 10-year Treasuries are trading near 3.92%, while yields on 2-year Treasuries are trading near 4.46%. Crude oil prices are modestly higher on Red Sea shipping concerns, while the grain and oilseed markets are mostly weaker to start trade today. Overall market sentiment is slowly slipping into holiday mode, although we still have several days of key economic data to go yet this week before we break for Christmas.
Housing starts surged to an annualized rate of 1.560 million units in November as mortgage rates fell along with gasoline prices to renew consumer confidence. The number was well above the highest analyst estimate going into this morning’s report. Permits for new starts remained relatively static though at an annualized rate of 1.460 million in November, down from 1.498 million the previous month, and slightly below the average trade guess of 1.470 million. This follows data released on Monday showing an increase in housing activity due to a re-emergence in confidence in the economy.
Ben Bernanke’s obsession with transparency made the Federal Reserve the single largest focus on Wall Street over time. Stocks rise and fall based on expectations of the direction of monetary policy, with traders parsing every word in every statement released, along with the tone inflection of every statement made at press conferences by Fed Chair Jerome Powell and other members of the Federal Open Market Committee. Speaking engagements for those members increased dramatically. Policy generally prevents receipt of speaking fees by Fed members while serving, but Forbes reports that those fees dramatically increase once they’ve left the Fed, with Treasury Secretary Janet Yellen receiving a reported $7.26 million from dozens of speaking engagements in 2019 and 2020 after leaving the Fed. Transparency would seem like a good thing, but in this case, it became Wall Street’s obsession. I recall the days when traders didn’t know when the Fed changed policy until they saw the effects of that change unfold. That kept traders focused on fundamental reports emerging from various aspects of the economy, rather than anticipating the Fed’s next move.
Jerome Powell and his team stated repeatedly that their primary objective was not to repeat the mistake of 1980 when the central bank pivoted too quickly. That resulted in a resurgence of economic activity that entrenched inflation pressures even more deeply, requiring even more drastic steps by Paul Volker’s team to get it under control. As such, Powell stated that this Fed would prefer to error on the side of “too high for too long” rather than to pivot too soon. To be sure, the Fed hasn’t pivoted yet. But its focus on transparency had it make statements that were interpreted as a pivot, and it’s done little to change that perception to this point. Those expectations of a pivot dropped the VIX to pre-pandemic lows as stocks pushed to new highs and $25 came off the price of a barrel of crude oil, dropping gasoline prices to two-year lows. The combination boosted consumer sentiment, and likely boosted national gross domestic product as much as 1.5% for the coming quarters. Housing starts jumped again as buyers took advantage of lower interest rates, boosting shelter costs that have been one of the stickiest sources of inflation in our economy. In the end, this will likely force the Fed to flip back hawkish again at some point, particularly in light of the surge in debt certificates coming onto the market in 2024 due to runaway government deficit spending. This cycle is also expected to impact money flow in the commodity sector over the coming year as inflation expectations re-emerge again.
The rains continue to pull forward in the forecast for dry areas of Center-West Brazil, with a notable increase in rainfall expected to start tomorrow, with both the frequency and intensity increasing over the next 10 days. Commodity Weather Group now calls for 0.50” to 1.5”, locally 4.5”, to fall over 60% of the soybean belt over the coming five days, focused on northern areas of the belt, although up to a quarter of the belt may still miss out. We should get another round of private production estimates emerge around the turn of the calendar, with StoneX Brazil updating its customer survey estimate on January 2nd. Data collection for that survey has not yet started. I anticipate that the production estimates will continue to trend lower. The question is, will they fall enough to necessitate an increase in U.S. exports that requires higher prices to ration U.S. demand? We have no evidence of that being the case yet, especially with Argentine production expected to double this year amid favorable weather conditions.
