Perspective: Morning Commentary for April 18

April 18 – We got a bit of a bounce in stock futures overnight, following recent losses, but traders continue to be troubled by the decidedly more hawkish tone emerging from members of the Federal Reserve in recent days as we march toward their next policy meeting on May 1^st. This morning’s jobless claim and Philadelphia Fed manufacturing data did little to ease recent concerns about rates staying “higher for longer.” The VIX is trading near 18 again this morning, while the dollar index trades near 106.0. Yields on 10-year Treasuries are trading near 4.60%, while yields on 2-year Treasuries are trading near 4.95%. Crude oil recovered from follow-through selling overnight, following sharply lower prices on Wednesday on long liquidation, while the grain and oilseed sector was mixed to weaker.

First-time claims for unemployment benefits remained unchanged at a low 212K claims in the week ending April 13, which came in below analyst expectations of a rise to 215K claims. The four-week moving average for claims was also unchanged at 214.5K. Continuing claims for the week ending April 6 rose a very slight 2,000 to 1.812 million, with the four-week moving average rising 4,250 to 1.805 million. These numbers reflect an ongoing tight labor market, which would be expected to get even tighter if we were to see the Fed cut rates in the near-term.

The Philadelphia Fed manufacturing index rose to 15.5 this month, up from 3.2 the previous month, and well above analyst expectations that it would come in at 0.0. The Philadelphia Fed reports that manufacturing activity in its district continued to expand this month, according to firms that it surveyed in recent days. Survey indicators for general activity, new orders and shipments all rose this month, while the survey’s employment index remained negative. The survey continued to suggest that firms are paying higher prices for inputs, and that they expect to see those higher prices passed along to their customers. Survey questions regarding future activity suggest that firms expect to continue to grow over the next six months, albeit at a bit slower pace than previously indicated.

WTI crude oil prices came under pressure again overnight, falling below the $82 level after approaching $88 last week. Market rhetoric suggests that traders are removing war risk premium regarding the Middle East, but I don’t really buy that. Israel has essentially guaranteed that it will respond to Iran’s weekend barrage of missiles and drones that were largely intercepted by the “Iron Dome.” We do not know what that response will be, or when it will occur, so we cannot know if the risk of a broader regional conflict that would negatively impact crude oil production and/or shipment has passed or if it will escalate. The markets were overbought and due for a correction, but the selloff seen on Wednesday, and again overnight, were pretty steep, suggesting that something else is at play. This is a period of refinery shutdowns for maintenance, especially in Europe, but that is largely known.

I’m sure all of the above factored into the recent selling to some extent, but I believe a bigger factor being largely overlooked is the sudden hawkish tone that we’re hearing from members of the Federal Reserve as they’re finally honest about what’s going on in the economy. They had the chance to be honest at the March meeting, but they instead reinforced hopes of a rate cut with their statement. That added to the reinflation problems, which appears to be apparent to them now. The Federal Reserve now seems to be going back to its previous stance of not wanting to repeat the mistake that it made in 1980 of pivoting too soon. “Higher for longer” means more efforts to slow the economy, reducing the rate of growth, which means reducing the growth in demand for energy. The war risk is still there, but I believe the focus the past day or two was on the Federal Reserve statements. My position is still where it’s been the past six months. I do not expect a rate cut this year, unless done so due to political pressure, and I cannot rule out another hike.

Grain and oilseed prices continue to struggle. Yes, we’re seeing a bit of strength in the hard red wheat markets as dry weather takes its toll on the Plains crop, as well as the Black Sea crop, while excessive wetness negatively impacts Europe’s crop. Yet, cheap Black Sea exports continue to keep a lid on the market. Meanwhile, corn and soybean prices remain at risk of testing the late February lows, led by cheap soybeans flowing out of Brazil. In fact, Brazil is expected to ship more than a half-billion bushels of soybeans this month alone. Rhetoric out of Argentina is increasing that a disease spread by the leaf hopper insect will cut output of its corn crop, but we have yet to see evidence that the losses will be great enough to justify rationing U.S. demand with higher prices. That day may come, but there’s not enough evidence of such at this point to justify sustaining a rally.