Perspective: Morning Commentary for March 15

By: Arlan Suderman, Chief Commodities Economist

Tue, 15 Mar 2022, 13:33

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

March 15 – The Wild West continues in the markets, as traders balance the war in Ukraine with today’s start of the Fed meeting, higher inflation numbers and conflicted economic data. Stocks paused overnight as the Fed garners more attention, and traders contemplated optimistic predictions from Ukraine that the war could be over in a matter of weeks – May at the latest – with a Russian defeat. Yet, the VIX firmed to trade near 32. The dollar index traded lower near 98.8 this morning, while yields on 10-year Treasuries traded near 2.08%, after reaching a new 32-month high near 2.17% earlier in the session. Crude oil prices are 6% lower, trading at their lowest level since February 25 as Covid increases shutdowns in China, while the Ags were mixed to lower overnight.

The producer price index rose another 0.8% month-on-month in February, falling short of analyst expectations of 1.0%. However, the January number was revised up to 1.2% gains, up from the 1.0% originally reported. The PPI rose 10.0% year-on-year in February, matching analyst expectations. The January number was revised to 10.0% year-on-year growth as well, up from the 9.7% originally reported. The core PPI that excludes the more volatile food and energy costs rose 0.7% month-on-month, up from 0.6% the previous month, while matching the pace seen the previous month. The core PPI rose 8.4% year-on-year in February, exceeding analyst estimates of 8.3%, which is also the reading recorded in January. This keeps inflation at both the consumer and wholesale levels at 40-year highs as the Fed begins two days of meetings to discuss changes in its monetary policy.

The Empire State manufacturing index fell to minus 11.8 in March, down from 3.1 in February and below analyst expectations that it would rise to 8.0. A number above zero indicates month-on-month growth, while the opposite is true as well. Today’s numbers reflect the first decline in business activity in the state of New York since the start of the pandemic. Both new orders and shipments declined modestly, while unfilled orders rose, leading to longer delivery times – substantially longer. Inventories increased as a result of the slower delivery times. Survey participants reported modest growth in employment and slightly longer workweeks. Prices paid by manufacturers remained elevated, while prices received reached another record high level. Ironically, plans for capital and technology spending remained solid, with firms also slightly more optimistic this month that conditions will improve over the next six months. The headline number on business activity went negative this month, as more firms reported that conditions had declined than improved, but the sector as a whole remained optimistic about the future.

Beijing slashed crude oil import quotas as Covid numbers continue to escalate across the country, resulting in larger shutdowns. China’s daily oil processing rate fell 1.1% through the first two months of this year, versus a year ago, putting it at its lowest level since December 2020. China reported 3,507 new locally transmitted cases of Covid-19 yesterday. The bulk of those – 3,076 cases – were in Jilin province, with 2,601 new cases in Changchun, but the rest of the numbers were scattered throughout a large portion of China. Authorities reported another 1,647 domestically transmitted asymptomatic cases yesterday. China does not classify these as confirmed cases yet, but they will likely turn into confirmed cases in the next few days. These numbers are small relative to much of the rest of the world, but they are rapidly increasing, resulting in massive shutdowns of cities and manufacturing, but also indicating that China’s zero-tolerance policy has thus far been unable to contain the Omicron variant.

The Federal Reserve must sort through conflicting data such as the above to set its course for monetary policy going forward while a war rages in Ukraine. I’m sure there will be some lively debate about the pace of interest rate hikes needed this year to tame inflation, and the role that shrinking the balance sheet should play in helping to raise rates naturally. The balance sheet represents the more than $6 trillion in stimulus that is still in the economy. The hawks in the group will want to be more aggressive to bring inflation under control before we repeat the high rates seen four decades ago, while the doves will be concerned that being too aggressive at a time when energy prices are high, and the Ukraine war rages, could drag us into a recession. The Fed helped create this scenario, which was made worse by the Ukraine war. There are no examples from history to look back on for guidance. This an unprecedented situation. The stakes are high, and Wall Street will be the judge tomorrow on the Fed’s performance, even though Wall Street has little guidance on the best path as well. History will be the final judge. Meanwhile, China’s covid problems make crude oil again a questionable hedge against inflation today, putting more emphasis on wheat prices to do the job. Corn and soybean prices pulled back notably but remain just below multi-year highs.

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