Perspective: Morning Commentary for November 11

By: Arlan Suderman, Chief Commodities Economist

Thu, 11 Nov 2021, 14:33

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

November 11 – Stocks attempted to bounce overnight, following Wednesday’s big sell-off on inflation fears. The VIX pulled back to trade near 18 this morning, after trading at four-week highs just below 20 yesterday. The dollar index continued to push to fresh one-year highs, trading above 95.0 this morning after yields on 10-year Treasuries surged to 1.59% on Wednesday. The Treasury market is closed today. Crude oil prices recoiled at the strength of the dollar on Wednesday, amid signs that Chinese demand is contracting. However, the Ags are mixed this morning, after mostly strong gains on Wednesday following a “better than feared” USDA WASDE crop report.

Inflation risks are the highest we’ve seen in 31 years, based on this week’s data, and they are showing no signs of abating. In fact, inflation pressures are accelerating, according to the latest data. President Biden even acknowledged this week that his Administration’s stimulus policies are contributing to inflation pressures as the added money available to the consumer elevates demand for goods and services above normal levels during a time when supply chains are trying to recover from Covid shutdowns and amid labor shortages. Yet, Congress continues to seek ways to apply greater fiscal stimulus to the economy.

Wall Street also took note this week of unconfirmed reports that President Biden had interviewed current Federal Reserve Governor Lael Brainard for the Fed’s Chair position. We know that both Brainard and current Fed Chair Jerome Powell had been invited to the White House. However, Brainard may not have the support of moderate Democrat Senators on fears that she would seek to use the Fed as a means to set up the infrastructure for providing universal income to all Americans – creating unlimited stimulus while removing the incentive to work. Whether that is true or not, I cannot say, but those fears are being expressed both in the Senate and on Wall Street, creating some uneasiness in the markets to go along with the inflation talk.

This week’s inflation data pushed yields on 10-year Treasuries up by more than 15 basis points at their high, creating demand from foreign investors still facing very low yields in Europe and Japan. That in turn created strong demand for U.S. dollars to participate in our securities markets. The strong dollar weighed on crude oil prices Wednesday, but inflation longer-term is historically seen as bullish for the commodity sector. The question is, when will yields overseas begin to catch up with U.S. yields to ease upward pressure on the dollar? It’s at that point that we would expect to see the dollar break to further fuel inflationary buys of the commodities. However, Fed fund futures trading is now pricing in expectations for up to three rate hikes in 2022, starting in June, that may keep upward pressure on the dollar for a while. That would be a much more hawkish stance than the zero rate hikes advocated by Fed Chair Jerome Powell.

The largely unspoken question in the markets is, can the Fed afford to raise rates for short-term securities? The U.S. government’s debt is just below $29 trillion currently. That means that every 1% increase in interest rates would add roughly $300 billion to the Federal budget obligation for paying interest on the debt. That would be roughly equivalent to what is currently spent by the federal government each year on education, health, and veteran’s benefits. It would take roughly 40% of the non-military discretionary budget to pay for a 1% rise in interest rates. As such, the Fed may be locked into maintaining rates at current low levels – at least the short-term rates that it controls. In fact, it may be faced with adding to asset purchases to help to hold down yields. But that added stimulus could create even greater inflation pressures going forward. The Fed has really painted itself into a corner.

The Ags did get a boost from the inflation data yesterday, even with the stronger dollar. The Ags started pushing higher the very minute the inflation data was released and they didn’t look back. There were other fundamental factors as well, such as Russia talking about export quotas, etc., but the change in money flow on the inflation data release was an observable factor amplifying the buying interest. The Ags do have a story, although the strength of that story varies by commodity. Barring any notable Southern Hemisphere weather problems, a global shift in crop mixes is expected to increase global soybean production at the expense of corn, at a time when Chinese demand is softening for the oilseed. Soybeans find some support for growing demand for the new renewable fuels utilizing the edible oils as a feedstock, but that demand will take time to develop. Meanwhile, evidence continues to emerge that Black Sea wheat supplies may be even tighter than first believed.

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