June 15 – Stock futures were mixed to weaker overnight on fears of more rate hikes from the Federal Reserve, but traders remain skeptical. The VIX continues to trade near 14 this morning, with the dollar trading near 102.8. Yields on 10-year Treasuries are trading near 3.74%, while yields on 2-year Treasuries are trading near 4.66%. Crude oil prices are more than 1% higher on stronger-than-expected Chinese refinery runs, while the grain and oilseed markets are stronger on dry Midwest weather forecasts and the weaker dollar, which dropped to a four-week low on Wednesday. Positive money flow was seen across many of the commodities in early trade this morning.
Wall Street got the “hawkish pause” it expected and more. The Federal Reserve paused its rate hike frenzy this month, following 10 straight hikes, but it made it clear that it is not done with rate hikes. The central bank frequently suggested that more rate hikes may be necessary in the past, but this time it specifically communicated that two more rate hikes would be likely this year. The markets had previously priced in one more rate hike in July, before cuts would begin by the end of the year. Fed members made it very clear in their statement that they did not want the markets to misconstrue this month’s pause as a pivot, with 12 of the 18 members indicating support for the future rate hikes, with more rate hikes next year not ruled out.
Fed Chair Jerome Powell understands the risks of resurgent inflation as long as stimulus remains in the system. He believes that tighter credit standards by banks will help do the job of slowing the economy, reducing the need for further significant rate hikes. However, he needs time. The perception of a dovish pivot could result in a resurgent stock market that would raise consumer confidence, resulting in an increase in spending, including in the housing sector – reigniting inflation before sufficient stimulus has been withdrawn. Therefore, the dot plot graphic that signaled two more rate hikes this year just might be the Fed’s method of buying time by keeping market euphoria and consumer sentiment under wraps a bit longer. For example, why didn’t the Fed go ahead and bump rates higher at this week’s meeting, if it truly believes that two more rate hikes are needed? Furthermore, why would Powell state that no decision has yet been made regarding a rate hike next month. This suggests that Fed members were in agreement on the pause, but conviction in additional rate hikes may be lacking – at least sufficient conviction to get the unanimous vote that Powell seems to crave. Powell made it clear that the primary challenge remaining to hit the 2% mandate for inflation is to bring down wage inflation, and that may take some doing. The European Central Bank moved forward with another 25-basis point rate hike this morning, but Powell’s pause gave China the opening that it sought for cutting rates and adding badly needed stimulus.
Retail sales grew 0.3% month-on-month in May, down from 0.4% growth in April, but well above the -0.1% expected by analysts. Retail sales minus vehicles grew at just 0.1% month-on-month in May, down from 0.4% in April, but matching analyst expectations. But retail sales minus vehicles and gas rose 0.4% month-on-month in May, down from 0.5% growth in April, but double the 0.2% growth expected by analysts. In other words, falling gas prices helped offset a resurgence in auto sales and a sustained rate of consumer buying. First-time claims for unemployment benefits were unchanged in the week ending June 10 at 262K, but that beat analyst expectations of 248K. The four-week moving average rose to 246.75K claims, up from 237.5K claims the previous week. Continuous claims for the week ending June 3 rose 20K to 1.775 million, with the four-week moving average dropping by 6K to 1.778 million. This reflects a relatively tight labor market when included with many other data points from the sector, which is the Federal Reserve’s primary concern yet at this point, keeping them from achieving their 2% inflation mandate.
Midwest crop ratings continue to slide lower in June as a predominantly dry pattern hangs over the region. Mild temperatures help offset the stress from the dryness, but water is still needed for crops. The long-anticipated pattern change tied to El Nino started last weekend, but then an upper-level low got cut-off in the atmosphere, which is expected to slowly drift into the Southeast in the days ahead, dragging moisture down with it, leaving much of the Midwest dry. Again, temperatures should remain relatively mild, but rain is needed. We will likely see another cut in crop ratings on Monday. Forecasters see good rains in the central and northern Plains in week #2, which should slowly prime the pump for moisture across the Midwest in the days that follow, but the area of greatest concern continues to be northern Illinois, eastern Iowa, much of Minnesota and Wisconsin. There’s a lot of corn in that region. Yield potential remains good for the bulk of the crop, but there are enough pockets where yield is being negatively impacted that are slowly expanding, providing a drag for the national yield potential. That will increase the longer this persists. This is not a repeat of 2012. There are many differences. But we are beginning to see a drag on U.S. corn producing potential. Is it enough to necessitate demand rationing in a world where demand is already soft? Probably not yet. Soft demand for U.S. corn gives room for some yield drag. But we do need to see rains return in the last half of June.
