September 21 – It’s still all about the Fed this morning, as traders continue to digest comments released in the Federal Reserve’s monetary policy statement, as well as those made by Chair Jerome Powell in his afternoon press conference. The VIX surged to a nearly four-week high above 16 this morning as Wall Street adopted a bit of a “risk-off” sentiment following yesterday afternoon’s statements. The dollar index followed Treasury yields higher, hitting a fresh six-month high above 105.7. Yields on 10-year Treasuries traded to 4.49%, representing a nearly 16-year high, while yields on 2-year Treasuries are trading at 17-year traded to 5.20%. The commodity sector joined stocks in the red overnight, but crude oil has reversed higher with strong fundamentals of its own, despite the fear of higher interest rates for longer, and despite the strong dollar. Yet, the grain and oilseed complex spent the night largely in negative territory due to the above factors related to the Fed’s statement.
The Federal Reserve still has more work to do to get inflation down to its 2% mandate, according to Fed Chair Jerome Powell. The central bank hinted that another rate hike was possible / likely yet this year, but it also worked to dial back expectations of a big pivot in 2024 – higher for longer. Powell did indicate that “we are in a position to proceed carefully,” suggesting that the central bank likely sees itself as being near the peak interest rate level. However, Powell also said, “We are prepared to hold at a restrictive level until we’re confident that inflation is moving down.” The market translates the above as an indication that rates will remain “higher for longer.” That’s seen as negative for the economy, which by the way, is consistent with how you bring down inflation. You cannot reach the 2% mandate for inflation without inflicting more pain on the economy, in my opinion, and that seems to be what the Fed is trying to avoid saying. Saying it or not, Wall Street seems to be finally understanding that this morning. The central bank seemed to hold back an additional rate hike at this meeting due to uncertainties tied to three current events – 1) a possible government shutdown in nine days, the UAW strike that will likely continue to expand, and 3) rapidly rising oil prices. The latter creates a problem for the central bank. Rising oil prices tend to slow the economy – an objective in taming inflation. But rising oil prices also tend to slow the economy due to their inflationary impacts, which goes against the Fed’s ability to hit the 2% mandate.
First-time claims for unemployment benefits fell to 201K in the week ending September 16, down from 221K the previous week, and below analyst expectations of 225K claims. This drops the four-week moving average for claims down to 217K, down from 224.75K the previous week. Continuing claims for the week ending September 9 dropped 21K to 1.662 million, while the four-week moving average for continuing claims dropped by 8,750 to 1.687 million. These numbers reflect a tight jobs market. Labor strikes are becoming more common these days because, a) the labor market is tight, giving them leverage, and inflation is still a problem, creating worker dissatisfaction with their pay. These developments continue to support wage inflation, which makes it difficult to get overall inflation down to the Fed’s 2% mandate.
Chinese stocks lost more ground overnight, as the Fed’s hawkish statement and resulting strong dollar mean that it becomes even more challenging for China to increase stimulus for its economy, while trying to maintain some semblance of strength for the yuan. The strong dollar also creates problems for developing countries with high amounts of dollar-denominated debt. China is targeting many of those countries now, offering lower-cost loans that will win the loyalty and dependency of those countries in the future as it expands its Belt and Road Initiative programs. China seeks to make Hong Kong a major financial hub for the so-called “New Order” supported by the new payment system used within BRICS and by BRI member countries.
China imported 9.36 million metric tons of soybeans in August, with 97% of them coming from Brazil. Soybeans imported from Brazil in August were up 2.85 mmt or 105 million bushels from the previous year, displacing U.S. shipments. China imported just 450K metric tons of U.S. corn in August, down 75% from the previous year’s pace, while stepping up Brazilian imports. Yes, relations with China are tense, but the bottom line is the bottom line. Brazilian corn and soybeans are well-priced, and buyers don’t have to worry about extra costs and delays due to low water levels on the Panama Canal and on the Mississippi River. That’s why the market comes under pressure as the dollar rallies, and why the market doesn’t seem to care that yields are coming in disappointingly low thus far. We will likely see USDA bring its yields down, but demand is a major concern.
