Perspective: Morning Commentary for March 18

March 18 – Stock futures surged higher early this morning, led by the tech sector, despite apprehension over this week’s meeting of the Federal Open Market Committee, which is expected to take a more hawkish tone toward monetary policy. The VIX is trading nearly 14.5 this morning, as it continues its slow trend higher on ideas that the Federal Reserve may keep rates high for longer, while the dollar index is trading near 103.4. Yields on 10-year Treasuries are trading near 4.32%, which is just below three-month highs, while yields on 2-year Treasuries are trading 4.73%. Crude oil prices pushed 1% higher in early trade to fresh three-month highs amid rising geopolitical risks and tightening supplies, while the grain and oilseed sector was mixed to higher overnight on those rising geopolitical risks as well.

Today’s focus is on this week’s Fed policy meeting, which will culminate with an updated policy statement scheduled to be released Wednesday afternoon, including the famous dot plot graphic reflecting the sentiment of individual policymakers, and a press conference with Fed Chair Jerome Powell. The market interpreted the Fed’s statements in December as a pivot in policy, which Powell did little to correct. However, the market’s – and consumer’s – reaction to that resulted in hotter-than-expected inflation data in each of the next three months. Treasury yields are trading just below three-month highs on expectations that the Fed will take a more hawkish tone in this week’s policy statement and press conference, with the dot plot graphic expected to show policymakers dialing back rate cut expectations. Fed fund futures are trading little chance of a rate cut at either this week’s meeting, or the May meeting, although they’re still maintaining slight odds of a June rate cut at this point, along with expectations of three rate cuts by the end of the year. That’s more in line with what the dot plot graphic released after the December Fed meeting showed, although it reflects a dialing back of the six or so rate cuts previously expected by the market this year. We’ll see on Wednesday how much the market needs to now adjust these expectations.

Japan appears to be on the cusp of finally ending negative interest rates this week, which is expected to have an impact on the U.S. markets as well. This isn’t a total surprise, as it is believed that internal plans for ending the negative rate era have been in the works since Kazuo Ueda became governor of the Bank of Japan 11 months ago. Annual labor talks with large companies in Japan resulted in pay raises averaging 5.28% - the highest in 33 years, raising hopes that higher wages will revive the stagnant housing market. That could give the green light to an end of negative interest rates, and for an end to Japan’s yield curve control policy, which would then increase expectations for future rate hikes. Japan is the largest holder of U.S. debt certificates at $1.1 trillion. Much of that money would be expected to head back home if Japan removes negative interest rates and yield curve controls – not all at once, but an acceleration of the trend already in place due to expectations of such. That would increase the potential problem of a lack of demand for U.S. debt certificates this year at a time when the supply of such is surging due to massive fiscal spending.

Friday’s CFTC Commitment of Traders report confirmed that recent price strength in the grain and oilseed complex coincided with the unwinding of short positions by managed money. They still lean heavily short, but not to the extreme extent seen this winter. This is largely a product of fund managers recognizing that we’re entering the time of year when risks of leaning heavily short tend to be higher, with increased headline risk from weather and geopolitical risks. But rising inflation indicators also historically have made fund managers nervous holding big short positions. Historically, they’ve preferred to be long the commodities when inflation expectations are rising, rather than short. Short-term inflation expectations are rising once again, with the five-year breakeven inflation rate also pushing upward. It’s still a bit early for a wholesale flip of managed money positions, but this is something that I’ll be watching closely as we head into the second quarter of the year. This week’s Fed meeting could also impact those expectations as well.

StoneX Brazil reports that 65% of its soybean crop is harvested, while 94% of its winter (safrinha) corn crop is planted as of Friday, with progress of both essentially complete in the highly productive Center-West region. Up to a quarter of the winter corn crop is under dryness stress currently, with risks of that increasing as we head into pollination next month. Meanwhile, the outlook is much wetter for the U.S. Midwest to close out the month, which should help refill the soil profile with moisture ahead of the approaching growing season. Fundamentally, it’s still difficult to argue for a sustained rally, but we have to respect the money flow, based on the above factors. Although wheat may have a bit more of a geopolitical risk factor to it. Recent Ukraine attacks on oil refineries deep into Russia are believed to have taken more than 7% of its capacity offline. That in turn has increased the Russian attacks on Ukraine’s export facilities at Odessa, raising risks for exports from the region. Support is currently most evident in the wheat market, as well as crude oil market, although that could spread to other commodities as well if things continue to escalate.