July 27 – The Fed has spoken, and Wall Street celebrates. Stock futures pushed higher overnight, led by the tech sector, following yesterday’s statement from the Federal Reserve, with added support from earnings reports. The VIX slipped even lower to trade below 13. Yet, the dollar firmed to trade near 101.4 as Treasury yields rose following the release of better-than-expected economic data this morning. Yields on 10-year Treasuries are trading near 3.90% this morning, while yields on 2-year Treasuries are trading near 4.89%. Money flowed into the broader commodity sector as well, with crude oil prices pushing nearly 1% higher on economic optimism, while the grain and oilseed sector found strength in another Russian attack on Ukraine’s export infrastructure overnight.
The Federal Reserve had few if any surprises for the market on Wednesday. It raised its benchmark interest rate by another 25 basis points, as was fully expected. The Fed also left the door open for another rate hike later this year, while speaking of moderate economic growth. It emphasized that its policy would continue to be driven by data, with a plethora of data points scheduled to be released prior to its next meeting eight weeks from now. Fed fund futures still reflect about 30% odds of another rate hike this year, but traders expect at least four rate cuts in the coming year. The bottom line is that Wall Street remains convinced that we can have a soft landing with the Fed pivoting policy next year.
The first reading of second quarter gross domestic product came in stronger than expected at 2.4% annualized growth, up from 2.0% the previous quarter, and above analyst expectations of 1.5% growth. Personal consumption expenditures rose by 1.6%, which is down from 4.2% growth the previous quarter, but still stronger than analyst expectations of 1.5% growth. Wall Street interprets this as further evidence that the Fed can tame inflation without inflicting too much damage on the economy, contributing to the ongoing optimism on the Street.
Durable goods orders grew at a robust 4.7% pace month-on-month in June, beating an upwardly revised 2.0% the previous month and significantly above analyst expectations of 0.5%. Durable goods orders minus transportation grew 0.6% month-on-month. That’s slightly below an upwardly revised 0.7% growth the previous month, but it is much stronger than the -0.1% pace expected by analysts. Core capital goods orders, which is an indicator of business optimism, grew at a 0.2% month-on-month pace in June, down from a downwardly revised 0.5% pace the previous month, but it was still better than the -0.1% pace expected. This data too yields optimism for Wall Street, although it does little to slow inflation.
First-time claims for unemployment benefits fell to 221K in the week ending July 22, down from 228K the previous week and down from analyst expectations of 235K claims. This dropped the four-week moving average to 233.75K claims, down from 237.5K the previous week. Continuing claims for the week ending July 15 fell a sharp 59K to 1.690 million, reflecting a further tightening of the jobs market. The four-week moving average for continuing claims fell by 10,750 to 1.720 million. This data suggests that wage inflation will not be slowing significantly in the near-term, creating more challenges for the Federal Reserve’s attempts to bring inflation down to its 2% mandate.
Russia sent two missiles into Ukraine’s Odessa port facilities overnight, inflicting more damage. The missiles were reportedly fired from a submarine in the Black Sea, flying at low altitude to make them difficult to detect. One of the port’s administrative buildings was hit, along with production equipment at one of the cargo terminals. Russia is expected to continue its strikes on Ukraine infrastructure, preventing it from exporting longer-term while painting itself as the good guy who provides food to the world. At least five ships and 26 objects of port infrastructure have been damaged the past nine days. Russia is also blocking movement of ships toward Ukraine.
It’s hot and dry across the Midwest, which is expected to continue over the coming week. There will be storms riding around the top of the high-pressure ridge that will benefit those who are fortunate enough to get them. Otherwise, crops should encounter additional stress over the coming week. The models continue to suggest that we will see a pattern shift in week #2 that shifts the Midwest milder and wetter, which is expected to be the pattern for much of August when corn fills and soybeans set pods. August overall is currently expected to be favorable for crops, leaving us again determining the scope of damage done by both the June and late July stress periods. The corn crop will still have ample opportunity to benefit from greater depth of kernel if the August forecasts verify milder and wetter, but the current stress period can still have an impact. My greatest concern for the corn that has already pollinated would be that the current stress created by extreme heat would be tip pull-back on the ears where they abort kernels on the end of the ear. Those kernels cannot be recovered later in August when conditions improve. I expect to see great variability between hybrids this year, with some experiencing significant losses, while others do quite well. It’s time to start walking fields to check them.
