Perspective: Morning Commentary for April 29

April 29 – It’s Fed week on Wall Street, with traders focused on expectations of what will be contained in the policy statement, and what will be said in the following press conference, that comes from the central bank on Wednesday afternoon. Beyond that, the focus is expected to be on jobs, with the government’s monthly jobs report coming out on Friday. Stocks firmed modestly overnight, as an underlying current of optimism about the economy emerges following the recent correction in the market. The VIX is trading near 15 to start the week, while the dollar index trades near 105.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.98%. Crude oil prices traded modestly lower overnight, while the grain and oilseed sector was mixed to firmer.

The Federal Open Market Committee will meet on Tuesday and Wednesday of this week, releasing a revised monetary policy statement on Wednesday afternoon, followed by a press conference 30 minutes later. No change is expected to its benchmark interest rate at this meeting, nor will there be a dot plot graphic released to visually show us how members of the policy committee’s attitudes toward rate cuts may have changed. As such, there will be a lot of focus on any potential changes in the wording of the policy statement on Wednesday, as well as the tone of the comments by Fed Chair Jerome Powell at the press conference that afternoon. Recent public statements have leaned hawkish. I’ll also be looking for any mention of the balance sheet. The Fed is currently reducing its balance sheet to the tune of $1.14 trillion per year. I’ve argued that the Fed will likely be scaling back that pace later this year, and I expect policymakers to start mentioning plans to do so at either this meeting or the next.

The ADP private sector jobs numbers come out on Wednesday morning, with weekly jobless numbers on Thursday and the government’s monthly jobs report on Friday to wrap up the key data releases this week. Market expectations are that we will see a tight jobs market confirmed for the month of April, which continues to support wage inflation pressures in the economy. A strong jobs market makes it difficult for the Fed to justify a rate cut. I think they still really want to throw a rate cut out there ahead of the election, and they probably need to do so by July if they’re going to do so. But doing so at a time when the economy is still solid and the jobs market is strong would also be stimulative in nature, adding to reinflation pressures. Fed fund futures currently have the first rate cut in September, but the economy would likely need to take quite a turn lower for the Fed to justify a cut so close to the elections. I still lean toward no rate cut this year. The exception would be if the Fed simply wants to do it for political reasons, or if the economy takes a sharp turn lower.

A very active weather pattern brought heavy rain, hail, and multiple tornadoes to our nation’s midsection late last week. The rains were welcome for an area where the soil profile was still wanting for moisture ahead of the growing season. Planting progress was active ahead of the late-week rains, and the pattern was expected to shift a bit drier as we move into the month of May to allow a resumption of planting once again. However, the models turned much wetter for central and western portions of the Midwest over the weekend, stretching over the next 10 days. That should slow down planting activity through the first third of the month if it verifies. The pattern looks to turn drier then after that period, which would allow for active planting progress again by mid-May. The market is okay with that, knowing that today’s farmer can plant the bulk of the crop in 10 days when given the chance. Concerns would be greater if we didn’t have a 2.1 billion bushel old-crop carryover projected. That said, concerns would be expected to start ramping up if the wetter pattern starts extending deeper into the second half of the month of May.

The western Plains again missed out on the rains. We frequently see model projections for that region to get rain, but then those forecasts fail to verify. Some of these areas have been waiting for months to get a good rain event. Commodity Weather Group currently estimates that 50% of the Plains hard red winter wheat crop is under stress, and thus we can expect that this afternoon’s USDA crop progress report will again show a deterioration in the crop’s condition ratings. My experience over the past 40 years is that the market trades Russian weather more than it does U.S. weather, but we’ve seen a better response to lower ratings the past couple of weeks, partly because southern Russia is also facing hot dry weather. That region has some chances for relief going forward, but confidence in those showers is currently lacking. It’s still early in Russia, but it becomes a bit more important to the crop to see moisture as we turn the calendar to May. Excessive wetness has been a problem in parts of Europe. The wheat market has already priced much of this in. Friday’s CFTC commitment of traders report confirmed active short-covering in corn, soybeans, and wheat during the reporting period, which was partially offset by active selling in corn and in soybeans as expected. The question now is, when do the rains return to Southern Russia?