Perspective: Morning Commentary for October 19

By: Arlan Suderman, Chief Commodities Economist

Wed, 19 Oct 2022, 12:29

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

October 19 – Stock futures pulled back overnight, amid lingering fear that aggressive monetary tightening policy by the Federal Reserve will risk sending us into a deep recession. The VIX continues to trade near 31 this morning, as it has remained above the pivotal 30 level throughout the past 10 days, even when stocks rallied. The dollar index is notably higher near 112.9 this morning. Yields on 10-year Treasuries are trading near 4.09%, representing a fresh 14-year high, while yields on 2-year Treasuries are trading near 4.50%, which is just below their recent 15-year high. Crude oil prices are 1% higher in early trade, while the Ags are mixed.

Transparency has been the name of the game for the Federal Reserve since Ben Bernanke served as chairman at the central bank from 2006 to 2014. That seems like a noble thing. We often didn’t know about a change in the Fed’s benchmark rate previous to Bernanke until we saw it in the marketplace. Meanwhile, the market focused on the various economic reports that come out each week, with none of them really standing out that much over the others, except possibly the quarterly gross domestic product reports. Today’s traders are obsessed with the Federal Reserve – every speech, every statement is parsed. Traders analyze every possible move to predict the Fed’s actions, and to anticipate the potential impact on the economy. The markets make big swings based on small nuances in statements made by policymakers in public appearance, or word changes in released statements.

The cycle for much of 2022 has repeated over and over again. Fed members come out with one voice to say that inflation is enemy number one, requiring aggressive monetary tightening. The market tanks, but then establishes a new base level on the assumption that the Fed won’t have the courage to sustain its tightening stance once the going gets tough. Then the Fed comes out and does what it says, and promises more of the same in the future, because inflation is becoming ingrained systemically into the economy. And the cycle repeats. The markets are again in that stabilizing mode this week, as stocks try to consolidate above recent lows on ideas once again that it has priced in the potential negative impact of the Fed doing what it says it will do, which currently involves raising its benchmark rate in the 4.5 – 5.0% range by early next year. But we’ve never tamed inflation in this country without positive real interest rates – interest rates above the rate of inflation. That may require even higher rates, which was stated yesterday by Minneapolis Fed Chair Neel Kashkari at a public appearance. Wall Street’s infatuation with what the Fed will do next goes beyond stocks to impact money flow into nearly every sector of the markets, including the commodities, frequently distracting them from the basic supply and demand fundamentals.

The war continues at an escalated level in Ukraine, with Ukrainian forces making significant advances in retaking control of territory previously occupied by Russian forces. Meanwhile, Russia continues its escalated attack on Ukrainian infrastructure across the country of Ukraine. Russia’s media calls the newly appointed commander of the Russian forces in Ukraine “General Armageddon.” Yet, even he admits that the situation is tense in Ukraine, as his troops play defense amid the advancing Ukrainian forces. How does this impact commodities? The question is, how far will President Putin and his “General Armageddon” go to turn the tide in this war. For now, Russia seems to know that it can’t win on the ground, so it is blitzing Ukrainian energy and water infrastructure, along with some civilian centers in an attempt to break the spirit of the Ukrainian people before their troops win the war on the fighting front. The very question of what Russia might do next will continue to keep the grain and oilseed markets on edge.

Chinese cash sources note that they purchased more than 20 cargoes of soybeans on Monday and Tuesday, without materially impacting U.S. futures. It’s not yet known how many of those cargoes came from the U.S. market, but we know that some came from South America, as has been the case lately amid high barge freight rates on the Mississippi River. Soybean stocks at Chinese crush facilities fell to a new record low 4.15 million metric tons this week, which is more than 30% below typical levels for this time of year. Soymeal stocks are the lowest since 2015. Yet, the lack of availability of soybeans continues to slow crush activity, drawing it down to just 1.65 mmt last week, although that’s up from 1.52 mmt the previous week. The five-year average for crush is 1.83 mmt, whereas it had topped 2 mmt a few weeks ago. The strong dollar and strong VIX will continue to provide headwinds for the grain and oilseed markets, while supply and demand fundamentals provide support for now. Wheat was the leader to the upside overnight due to geopolitical risks, while corn and soybean prices struggled amid the ongoing harvest and lack of fresh bullish news to counter the above Wall Street fears.

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Mike CastleTue, 04 Aug 2026, 14:58

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