Perspective: Morning Commentary for September 8

By: Arlan Suderman, Chief Commodities Economist

Thu, 08 Sep 2022, 13:27

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

September 8 – Rising interest rates and their anticipated impact on the global economy continues to be the primary topic of conversation on Wall Street, following this morning’s decision by the European Central Bank, and ahead of the Federal Reserve’s next meeting in less than two weeks. Stock futures were generally lower in early trade, while the VIX traded near 26. The dollar index traded near 110.0 this morning, after rising to a fresh 20-year high over each of the previous three sessions. Yields on 10-year Treasuries traded near 3.29%, while yields on 2-year Treasuries traded near 3.49%, as that inverse widens a bit again. Crude oil prices traded at their lowest level since mid-January overnight near $81 per barrel, before rallying this morning. The grain and oilseed sector is mixed in overnight trade.

First-time claims for unemployment benefits fell to 222K in the week ending September 3, down from 228K the previous week, and much below analyst expectations of 240K. That drops the four-week moving average to 233K claims, down from 240.5K the previous week. Continuing claims rose 36K in the week ending August 27 to 1.473 million, with the four-week moving average rising to 1.439 million. This is one of the key numbers to monitor as we watch for evidence of a slowing jobs market. The Fed needs to push the unemployment rate higher – likely to 5.5% or more – in order to slow wage inflation, which is one of the key components of overall inflation.

The European Central Bank raised its benchmark interest rate 75 basis points from zero this morning – it’s largest increase on record. It signaled that additional rate hikes were almost a certainty as it seeks to get inflation under control before the anticipated recession sets in. The move comes as inflation indicators heat up for Europe, with the ECB raising its inflation outlook to 5.5%, up from 3.5% previously. It’s amazing how slow central bankers around the world have been in recognizing the scope of the inflation problem, making them slow to respond to it. The whole purpose of the unprecedented fiscal and monetary stimulus programs during the pandemic was to stimulate demand. Demand increases when you increase the supply of money in the consumers hands.

Policymakers then seemed surprised to see inflation develop when demand exceeded levels for which the supply chains were designed to handle, even in normal times. Policymakers then failed to grasp in time the scope of action that they needed to take to withdraw that stimulus via monetary tightening. Most fiscal policymakers still don’t understand that. Traders seem to think that inflation can be brought down without slowing the economy, but that’s exactly what has to happen once inflation gets out of control. The economy must be slowed to the point of bringing money supply down so that consumer buying slows back to levels that can be supported by the supply chains. Simply slowing the economy with consumer fear won’t do it, because inflation jumps right back again once the fear passes. You have to reduce the money supply. Monetary policymakers now seem to understand that, but they generally lack support from fiscal policymakers – both here and overseas.

China continues to build a strategic trading partnership with Russia amid rising tensions with the United States and with much of the West. The latest agreement sees China paying for natural gas imports from Russia based on a 50-50 split between the ruble and the yuan, signaling a move away from the dollar as a global currency of trade. Bilateral trade between the two countries increased to $117.2 billion in the first eight months of this year, up 31.4% from the previous year’s pace. Chinese imports from Russia totaled nearly $73 billion, up nearly 51% from the previous year. The two countries are expected to continue to meet in the coming months to develop other trading partnerships that strengthen their relationship as China moves away from dependence on the United States. Yet, the United States continues to buy from China, suggesting a widening trade gap between the two countries.

Russia remains adamant that the safe-corridor arrangement for Ukraine grain shipments must change, while Ukraine argues that two-thirds of the grain leaving its ports is destined for poorer countries in Asia, Africa, and the Middle East. This remains another headline risk for the markets as it unfolds. Elsewhere, Argentina’s temporary offer of 200 pesos to the dollar for farmers who sell soybeans dumped 2.13 million metric tons (78 million bushels) on the market in the first two days, with Chinese buyers sweeping in to take a portion of that. Fundamentally, U.S. and global corn balance sheets are tightening, while soybeans are steady, or maybe even increasing. Exportable supplies of milling wheat are snug, but in balance with demand currently. USDA will weigh in with its revised production estimates and adjusted balance sheets on Monday. In the meantime, all of this is being traded within a broader context of recession fears. Fund managers are painting with a broad brush, expecting demand for commodities to tank as recession hits the global economy. That colors the filter through which traders interpret fundamental supply and demand data. That will change at some point. We don’t know when that will be, but it probably isn’t going to be near-term.

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August 7 – The U.S. economy unexpectedly lost 23k jobs in July, dramatically below market expectations of an 80k increase and marking the worst Non-Farm Payrolls print since February. Furthermore, May and June were both revised sharply downward, with combined revisions showing 103k fewer jobs than previously reported. Outside of the healthcare sector, which added 22k jobs in July, the losses were very broad-based. Government payrolls saw the largest decline, shedding 53k jobs in July, the largest seen since October 2025, while June was revised down to show a loss of 10k jobs as well. The private sector at least saw growth, adding 30k jobs in July, now matching the month prior after it was revised down from the 49k initially reported, and substantially missing forecasts of 78k jobs being added. This is a sharp reversal in course from the largely better than expected U.S. labor data seen earlier this week.

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August 6 – Stocks remain quietly mixed at midday as both the S&P 500 and Dow Jones remain just below their fresh all-time highs put in yesterday. This is allowing the VIX to cool to a four-week low below the 15.4 mark, reflecting the collective sigh of relief in the market amid largely better than expected U.S. economic data today. The dollar remains quietly in the green in its relatively tight range this week, trading at 99.9 at the time of writing. Treasuries remain elevated but have cooled from their recent peaks, with 30-year yields trading at 5.189%, 10-year yields trading at 4.647%, and 2-year yields trading at 4.229% at midday. Crude oil also remains quietly in the green, with nearby WTI up 2.3% on the day trading near $76.80 and nearby Brent up 2.4% on the day trading near $81.40. The ags remain mixed, with the wheat complex now squarely in the red while corn and soybeans cling to small gains, and the livestock complex largely pushes lower.

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