May 1 – It’s Fed Day today, with Wall Street focused on what it believes the central bank will do, and what Federal Reserve Chair Jerome Powell might say to give insight into future monetary policy direction. But first, traders had to deal with some employment data, which again came in a bit stronger than expected. The VIX is trading near 16 this morning, while the dollar index is trading near 106.2. Yields on 10-year Treasuries are trading near 4.65%, while yields on 2-year Treasuries are trading near 5.02%. The latter appears to be garnering a bit more comfort above the pivotal 5% level, but we’ll have to see where that sits following today’s Fed statement. Crude oil prices fell to essentially six-week lows earlier today, and they are currently more than 1% lower on the session, while the grain and oilseed sector traded mostly lower overnight as well.
The private sector created 192K jobs in April, according to ADP, exceeding analyst expectations of 175K jobs created. Furthermore, ADP revised its March number to 208K jobs created, up from the 184K originally reported. Put this together with this week’s employment cost index data, and recent weekly jobless claim data – which will also be updated tomorrow – and it sets the tone for a possible strong monthly jobs report from the government on Friday. We’ll see the monthly JOLTS report later this morning that provides insight into job openings and the current quit rate among employees. Members of the Federal Open Market Committee are completing two days of policy meetings today. They will have seen the above, but they obviously will not have the opportunity to see Friday’s jobs numbers before making their decisions today. They will be considering many different factors, but the jobs sector is near the top of the list. It’s difficult to bring overall inflation down to the 2% mandate when wage inflation is running 4 – 5% annually, making it a significant inflation factor in the service sector, as well as adding to the cost of goods.
Fed fund futures traded 99% odds this morning that the Fed will not touch its benchmark interest rate today. It was interesting to see that the remaining 1% odds are for a possible rate hike. That truly would be a surprise to the market because the Fed hasn’t prepared the markets for that possibility, which would go against its transparency objective. Fed fund futures now push the odds of our first rate cut back to November 7, which would be two days following the presidential elections. I have not felt that they would cut rates ahead of the elections, and I question whether they would do so two days following the elections unless the economy was taking a sharp turn lower. Doing so would also look political, even if it wasn’t. The market is pricing in just one rate cut this year, taking us down a similar path as what we saw in 2023. The question is, how long can the Fed state that it is committed to the 2% mandate, while not doing enough to get us there? I’m not making the argument that 2% is necessarily where the mandate needs to be, but rather I am asking the question because it lends to the Fed’s credibility. We’ve been above 3% for three years. Does the Fed really have a commitment to get us to 2%? The answer to that question would provide insight into what we can expect from the policymaker going forward. Regardless, I’ll be watching for any signs today that the Fed is about to slow the pace of reducing its balance sheet going forward.
The Biden Administration revealed its path for ethanol to qualify for subsidies as a sustainable aviation fuel (SAF) feedstock on Tuesday afternoon. The announcement ended months of speculation and delayed announcements. In the end, the Biden Administration chose a revised GREET climate model that factors in assumed lifecycle emissions of ethanol and other biofuels under a variety of circumstances, while making assumptions about the impact of related land use changes that would impact climate. That leaves ethanol short of being an assumed feedstock for SAF, as many areas of the country will find it difficult to achieve the cover crop requirements, among other things. There’s also a fear that these requirements will also be applied to the foundational Renewable Fuel Standard as well, which would create another major setback for the biofuel industry. Meanwhile, we’re starting to import ethanol made from sugarcane in Brazil to produce SAF in the United States. This was a major disappointment for the ethanol industry, but it wasn’t unexpected. The market impact of the announcement has been relatively small because Wednesday’s announcement in Washington was a poorly kept secret – it was widely anticipated and already priced into the market, leaving corn prices struggling to sustain a rally at this point.
June live cattle futures lost $3.60 per cwt over the past two trading sessions following reports that USDA will be testing raw beef samples for the bird flu virus. That raises fears among fund managers about how the consumer may respond to these reports, and what happens if these results are poorly communicated? We don’t know if the virus will be found in beef, but more importantly, we don’t know if that creates a safety concern for human consumption. Perception is reality for the consumer, and fund managers don’t want to take that risk right now. High prices due to tight supplies are already creating consumer demand problems, with avian flu adding to the concerns.
