February 22 – The tech sector led stock futures higher overnight, following a strong earnings report from Nvidia following the close on Wednesday, although gains were limited somewhat by the release of minutes from the latest Federal Open Market Committee meeting that had a hawkish tone to them. The VIX is trading back near 14 this morning as worries on Wall Street ease, while the dollar index is trading near 104.0, after dipping to nearly three-week lows earlier in the session. Yields on 10-year Treasuries are trading near 4.32% this morning, after jumping to their highest level since December 1, while yields on 2-year Treasuries are trading near 4.70%. Crude oil prices are modestly lower this morning, while the grain and oilseed sector is mixed to firmer on a weaker dollar overnight.
The FOMC reiterated its concerns about pivoting too soon at its January meeting, which was revealed in the minutes of its latest meeting that were released Wednesday afternoon. The bulk of the members expressed concern about cutting interest rates too soon, which could allow inflation pressures to rebound. The minutes revealed that “only” a couple of members worried about downside risks to the economy if they maintained their restrictive policy too long. The meeting minutes reinforced the message that we’ve heard from the Fed for quite some time – that they would rather risk higher for longer than pivot too soon. They still remain confident that they can begin their cuts later this year, but the minutes also noted concern that progress on bringing down inflation could stall if the economy continues to perform as strongly as it has in recent weeks and months.
But the data shows that the economy gained momentum after the December meeting when the Fed merely signaled a willingness to pivot soon. We have a consumer-driven economy, driven by consumer sentiment. Consumer sentiment regarding their current situation versus a year earlier, and their sentiment looking a year ahead both turned higher following that December Fed meeting, as the stock market moved to new record highs. That’s when inflation pressures started to return as well, while the jobs market also tightened again. It should be noted that “many participants” of the FOMC meeting indicated an interest in in-depth discussions at the March meeting regarding bringing an end to quantitative tightening via shrinking the balance sheet. I have long felt that the Fed will be forced to return to buying Treasuries at some point this year if yields on the longer-end of the yield curve continue to trend higher due to the surge in supplies this year as Congress continues to spend more than it brings in. This will prove to be another challenge in this election year, as Washington maintains stimulus in the economy.
First time claims for unemployment benefits fell to 201K in the week ending February 17, down from 213K the previous week, and below analyst expectations of 216K claims. The four-week moving average dropped to 215.25K claims, down from 218.75K the previous week. Continuing claims for the week ending February 10 fell by 27K to 1.862 million, with the four-week moving average falling by 8,500 to 1.878 million. These numbers continue to reflect a tight jobs market, which tends to support higher wages and upward pressure on overall inflation.
The Chicago Fed national activity index fell to -0.30 for January, down from 0.02 in December, and lower than the -0.16 anticipated by analysts. This puts the three-month moving average at -0.02. The index is a weighted average of 85 existing monthly indicators constructed to have a value of zero when the economy is growing at a trend rate, with a standard deviation of one. The above numbers indicate above-trend economic growth in December, with below trend growth in January, while the three-month average is right at long-term trend growth.
Corn prices hit a fresh three-year low overnight, as prices continue to slowly erode lower. Managed money net short positions are approaching record territory in the grain and oilseed complex, despite geopolitical risks. Both Russia and Ukraine are dumping as much grain on the world market as they can, at whatever price it takes to move the grain, in order to pay for the war effort. This combines with cheap supplies coming from Brazil as well. The markets are generally oversold, and the geopolitical risks are real, but the point at which those dynamics will become a turning point where cheap prices generate demand is still yet unknown. We are seeing some increase in demand for corn and wheat at current price levels, but not enough to dramatically turn market sentiment. Meanwhile, this year’s weather pattern supports an early spring warmup, which is expected to result in farmers needing to move corn – especially any stored a little wetter than desirable – earlier than normal, adding pressure to the cash market. The farmer is generally undersold on corn and soybeans in both Brazil and in the United States.
