July 9 – Stock futures pushed modestly higher overnight, despite reports that President Trump will deliver more notices of rising tariffs today after the 90-day pause on reciprocal tariffs has expired. The president announced 50% tariffs on copper on Tuesday, in addition to a host of letters raising tariffs on countries that failed to reach trade agreements with the United States. Yet, stocks remain near record high levels, while the VIX trades near 16. The dollar index continues to firm, trading near 97.5 this morning. Yields on 10-year Treasuries are trading near 4.40%, while yields on 2-year Treasuries are trading near 3.89%. Crude oil prices are modestly lower, while the grain and oilseed markets are also modestly lower once again as the market seeks a price that will create new demand for this year’s anticipated large crops.
The minutes of the June meeting of the Federal Open Market Committee are scheduled to be released this morning, and they’re expected to reveal a variety of opinions – some would even say a divided Fed. Federal Reserve Chair Jerome Powell has done a masterful job of keeping the FOMC members united on their public stand, with nearly all votes unanimous. But comments made by various FOMC members suggest that they have very different views on the inflationary and growth impacts of the tariffs. Seven members of the FOMC indicated on the June dot plot graphic that they don’t expect any rate cuts this year. Will the minutes shed light on their views, versus those who do expect cuts to come later this year?
The minutes are expected to bring this debate to light at a time when President Trump is calling for deep interest rate cuts. He’s also calling for Powell to resign, using insulting language in saying that Powell isn’t very smart. I’ve been very critical of the Federal Reserve, but Wall Street has already sent a very clear message to the president about how it feels about maintaining the independence of the Fed, and with that I agree. Yet, Trump continues to move forward with a selection process for nominating his next Fed chair, even though Powell’s term doesn’t end until May. My guess is that he desires to influence the Fed by making an early nomination from someone already on the Fed at a time when signs of division are being seen. FOMC members would face a dilemma on whether they want to stay loyal to a lame duck chair, or should they swing their loyalty over to the individual who has been selected to be the next chair. It’s presumed that the nominee would be someone who favors lower rates. This could theoretically result in a swing in policy in Trump’s favor. I disagree with this method of influence, but it may very well be the direction that we are headed. So, at what point does the market start trading such?
The next question then would be, how does this impact the economy? The Fed only controls the short-term overnight rate, while it can try to influence the longer-end of the yield curve. However, the longer-end of the yield curve is increasingly trading fiscal policy rather than monetary policy. Tariffs are a part of that, but runaway spending is a larger part of it. Both parties are responsible for our growing debt – one just does it faster than the other. Our nation’s rising debt problem means that half of the available investment money for securities is going to finance our government’s debt, leaving less money available to finance corporate expansion and business development. That tends to slow economic growth. Furthermore, foreign investors are taking their money back home, for various reasons, decreasing demand for U.S. securities at a time when the supply is growing. That also leads to higher yields. The best example of this came in September when the Fed cut its short-term rate by 50 basis points, followed by another 50 basis points through the end of the year. But 10-year yields rallied by more than 100 basis points during that period due to the above dynamics. Lowering the front end of the yield curve may allow the government to save money on the cost of servicing its debt, but it may not have the desired stimulus effect on the economy if the long end of the yield curve is going higher.
Market share continues to shift from the U.S. oilfields to OPEC, as relatively low prices reduce U.S. drilling, while OPEC ramps up production. Yet, prices continue to firm, as the surplus barrels continue to be absorbed by the world market, suggesting rising demand. Meanwhile, grain and oilseed prices continue to slide as traders seek price levels that will create more demand for this year’s anticipated large crops. The winter wheat harvest is large, and now favorable Midwest weather raises the risks that the corn and soybean crops could be large as well. Yield models are pushing well above trend levels for both corn and soybeans, although the critical time for soybean development is yet to come in August. We’ve seen a pattern of drier Augusts in recent years that have shaved bushels off the national average yields for both crops, and that remains a possibility this year as well. Even so, traders know that the risks of big crops are growing at a time when China isn’t buying, and South America also has big crops. As such, traders are working to shore up the demand side of the balance sheet as the supply side looks to expand.
