January 2 – Happy New Year! It’s a new day, month, quarter, and year on Wall Street. Stocks finished 2023 on a positive note, but stock futures sounded a weaker tone overnight in preparation for this morning’s opening as Treasury yields spiked higher – particularly on the longer-end of the yield curve. Traders look forward to the release of the minutes of the December Federal Reserve meeting tomorrow, which should provide greater insight into the thinking of members of the Federal Open Market Committee. The VIX is trading near 14 as we open trading for 2024, while the dollar index is sharply higher near 102.2. Yields on 10-year Treasuries are trading near 3.96%, after hitting a 19-day high above 4.02% overnight. Yields on 2-year Treasuries are trading near 4.34%. Crude oil prices are 1% higher on elevated Red Sea risks combined with higher Chinese import quotas. The grain and oilseed sector remained closed overnight, but Brazilian rains over the weekend and coming this week are expected to limit buying interest in soybeans.
How soon and how many rate cuts will we see this year? That’s the question that traders hope to find answers to when the FOMC releases the minutes of its December meeting tomorrow. There’s no doubt that Wall Street interpreted the statements made in December as a pivot by the central bank, and now they want to know the details. Fed fund futures trading reflects nearly 80% odds of at least a 25-basis-point rate cut in the March meeting at this point, with up to 150 basis points of cuts expected by the end of the year. That’s likely an overly optimistic expectation, based on what the Fed has previously stated, and based on the data to this point, but that is the expectation priced into the market currently. Monetary policy has a big impact on Wall Street sentiment, and that can also have significant implications for the commodity markets.
Monetary policy impacts market expectations about our economy, as well as market expectations for inflation. We can track those market expectations several ways. I like to focus on the Five-Year Breakeven Inflation Rate, which reflects what the market believes will be the direction of future inflation in the years ahead. Our StoneX Commodity Tracker reflects the changing value of a basket of 27 commodities. The 10-year correlation between our StoneX Commodity Tracker and the Five-Year Breakeven Inflation Rate is 0.87 currently. A correlation above 0.70 is considered to be statistically strong. There’s often a two-to-three-month lag for commodity values following changes in inflation expectations. Money tends to flow into the commodity sector when the market starts to anticipate rising inflation risks, while it flows out when it thinks that inflation will be trending lower with recessionary risks. We’ve generally been in a commodity deflation mode for the past 21 months since the Fed started raising rates, with both inflation expectations and commodity values trending lower through the bulk of that period. An individual commodity or class might rally on a bullish headline, such as escalated tensions in the Red Sea or Black Sea, but then managed money defaults back to the commodity deflation mantra once the headline that created the rally cools.
The question now is, will the perceived pivot by the Fed that spurred the rally on Wall Street create enough fresh consumer demand for goods, services, and housing to raise inflation expectations again? I am in the camp of those who believe that will be the case, which could then flip the narrative on commodities in 2024. Keep in mind that the 10-year correlation between our StoneX Commodity Tracker and the U.S. consumer price index is 0.89 – even stronger than the correlation with inflation expectations. The 10-year correlation between our Energy sub-tracker and the Five-Year Breakeven Inflation Rate is 0.84, while its correlation with the CPI is 0.85. The 10-year correlation between the StoneX Grain and Oilseed sub-tracker and inflation expectations is 0.84, while the correlation between the grain and oilseed sector and the CPI is 0.86.
An active rain pattern began to develop over dry areas of Center-West Brazil over the holiday weekend – not general rains, but an active thunderstorm pattern, nonetheless. Commodity Weather Group notes that two-thirds of Brazil’s soybean belt saw 0.50” to 2.50”, locally up to 7.75” of rain over the past four days favoring central and northern areas of the soybean belt. The next five days should see another 0.50” to 2.50”, locally 6.00” over 60% of the belt, filling in many of the dry areas. Those areas likely to miss out on the rains over the coming week include dry spots in Parana and Sao Paulo, although Parana should see rains return mid-month, when Center-West Brazil begins to dry out again. Much of the yield potential in Center-West Brazil should be set with this round of rain. That doesn’t mean that all will be well with the crop, as some irreversible damage was done by the prolonged heat and dryness in the region. But it does mean that weather will have less of an impact on the soybean crop’s potential in Center-West Brazil beyond this event, with the focus soon shifting to the winter corn crop planting. Weather will still matter a great deal to later planted soybeans in northeast Brazil, as well as in southern areas. StoneX Brazil will be releasing the updated results of its latest customer survey shortly this morning, providing greater insight into the crop’s production potential.
