Guest Commentary by Mike Castle
Senior Commodities Economist
July 30 – The Fed held steady as expected, but in a divided decision as three of the twelve FOMC members dissented in favor of a 25-basis point hike. That end result, coupled with new Fed Chair Kevin Warsh’s subsequent press conference, struck a notably hawkish tone—no surprise given the rise in real rates and the expected path of policy since the Fed’s last meeting, developments Warsh also highlighted. Part of this hawkish tilt was Warsh unequivocally rejecting any tolerance for above-target inflation, reiterating “there is no soft implicit target—not on this Committee’s watch. There is only a target, and it is 2%.” He also acknowledged that five-plus years of above-target inflation had damaged public confidence in the Fed’s commitment to that 2% target, while arguing that credibility now depends on delivering actual price stability rather than relying on guidance. The new Fed Chair has obviously inherited a very difficult situation, growing more complex seemingly by the day, though this morning’s employment and inflation data both look to provide something of a sigh of relief, however brief. Traders will likely take some time to adjust to the new era at the Fed, with an explicit emphasis on providing less forward guidance, but as we’ve seen time and again, the market will find a way to adapt.
30-year Treasury yields broke above 5.20% for the first time since 2007 in the hours following Warsh’s remarks, raising additional red flags in an already jittery market. Investors are demanding a materially higher real return to hold long-dated U.S. debt, inviting the question of whether monetary policy (i.e. the Fed) can control the long end of the yield curve when borrowing needs and debt-service costs continue rising, especially as older debt is refinanced at much higher rates. While geopolitical headlines have claimed the market’s attention for some time now, the U.S. national debt has continued to balloon in the background, approaching the $40T mark, with the interest on this debt now over $1.1T, making the prospect of higher rates even more impactful.
Stock futures are pointing to a solid rebound on the open, with the tech-heavy Nasdaq looking to lead the way higher after its ugly selloff that saw the index post its lowest close since April 29th. A strong earnings report from Microsoft, showing evidence of both AI monetization and spending discipline, is helping offset some of the disappointment in earnings from Meta and Qualcomm, with both showing solid revenue but missing expectations while also keeping the market’s concerns regarding ballooning capex front of mind. The market will get more earnings to parse through today, with both Amazon and Apple due to report after the close. The VIX is down significantly from the roughly six-week high made yesterday, falling back below 19 at the time of writing. The dollar made a fresh two-week low this morning and remains in the red, trading below the 100.7 level. Treasury yields are inverting notably, with the biggest move being in the 30-year, outlined above, while 10-year yields have pushed to 4.675% and 2-year yields sit at 4.245%. Crude oil is modestly weaker despite fresh escalations in the Middle East, with nearby WTI down roughly 1.5% to trade near $83.40 and nearby Brent down 1.1% to trade near $87.10 at the time of writing. The ags are mostly higher, with a surge in the wheat complex dragging the other grains and oilseeds along with it amid major escalation in the Black Sea that we’ll dive into below.
Weekly claims for unemployment benefits came in slightly below expectations at 197k in the week ended July 25th, a very moderate rebound from the decades-low 188k seen in the week prior (revised up slightly from the 187k initially reported). On another positive note, continuing claims fell to 1.782 million, well below the average estimate of 1.798 million, while the week prior was also revised down to 1.789 million from the 1.796 million initially reported. The four-week moving average slipped to 202.75k, down 5k from the week prior and marking the lowest print seen since mid-May. Overall, this morning’s data continues to point to an impressively resilient U.S. labor market, which does give the Fed some breathing room to move rates higher moving forward, which should be taken favorably by traders.
Headline PCE inflation fell 0.1% month-on-month in June, its first negative print since April 2020; excluding the height of the pandemic, this would be the lowest reading for monthly changes in headline PCE since January 2019. In year-over-year terms, headline PCE inflation eased to 3.7% from the 4.1% seen in May, matching analyst estimates and following in line with favorable June CPI and PPI prints. Digging deeper into core inflation, we saw a 0.1% month-on-month increase, slightly below the estimated 0.2% and marking the smallest increase seen since March 2025. In year-on-year terms, core PCE was up 3.3%, down slightly from the 3.4% seen in May and matching analyst estimates. As with the weekly employment data, this should be taken favorably by traders, though it is certainly staler given the resumption of fighting in the Middle East and subsequent rise in energy prices in July, which will likely drive a rebound in inflationary pressures. Still, given the onslaught of negative headlines elsewhere, the market should welcome the brief reprieve.
The wheat complex is surging after Ukrainian strikes on the Russian port of Taman, reportedly causing “significant damage” to a major grain export terminal, as well as a sunflower oil export facility. This is a notable escalation from Ukraine, with most previous attacks on commodity movement focusing on vessels themselves or, when striking port infrastructure, focusing specifically on energy. Russia’s ability to ship via the Sea of Azov remains effectively shut off, forcing them to redirect to their Black Sea ports and thus inherently increasing their importance. That makes today’s development matter even more. The big question the grain market must ask now is whether today’s strikes are a one-off, or whether Ukraine will be shifting strategy to include a focus on Russian grain export infrastructure, with the biggest target being the top Russian wheat exporting port, Novororossiysk. The other big question the market must ask is how Russia will respond, as they’ve already ramped-up attacks specifically targeting Ukraine’s grain and edible oil export infrastructure. Regardless of what comes next, the ongoing escalation in the Black Sea region continues to bring back memories of what commodity markets feared four years ago when the full-scale war kicked off. With that said, the wheat market is seeing the most strength from this round of escalation, but it’s also important to keep in mind the potential impact on other agricultural commodities, notably edible oils, corn, and other feed grains.
