Perspective: Morning Commentary for May 7

May 7 – Stock futures were mixed in early trade today, while the commodities were generally under pressure as well. The war in the Gaza Strip is heating up again, interest rate hopes are fading, and a former president is on trial. Wall Street’s worry index, the VIX, is still trading at historically low levels just above 13, so there isn’t a sense of panic, but rather more of a lack of direction in the near-term. This week’s slate of economic data is thin, leaving traders monitoring a myriad of public appearances by members of the Federal Open Market Committee this week for direction. The dollar index is trading near 105.1 this morning, reflecting the weaker bias of Treasuries. Yields on 10-year Treasuries are trading near 4.44%, while yields on 2-year Treasuries are trading near 4.82%. Crude oil prices are modestly weaker in early trade, sitting just above nearly eight-week lows, while the grain and oilseed sector was mostly weaker overnight as well. However, overnight trade in the grain and oilseed sector has not been a very good indicator of daytime direction of late.

Wall Street continues to be fixated on what it believes that the Federal Reserve will do with its monetary policy. That fixation was created by former Fed Chair Ben Bernanke’s commitment to transparency. Normally, one would think transparency would be a good thing, but Wall Street has become obsessed with it. The problem is, markets are almost always wrong about what the Fed will eventually be doing, if one looks at the track record. But don’t be too hard on traders, because the Fed is almost always wrong as well, and it is the one giving direction to the market. The market’s forecasts typically mirror the Fed’s forecasts in its dot plot graphic, although often times the market will amplify the anticipated move in the dot plot graphic.

The dot plot graphic is a graph on which at every other meeting each member of the FOMC puts down where they believe that the Fed’s benchmark rate will be at the end of the current year, the next year, the year after that, and long-term. That series of dots on the graph then provide a visual representation of the current thinking of policy committee members. A look at the track record of the past 16 years reveals that the median rate curve projection in the dot plot graphic typically isn’t even close to what the Fed ends of doing. It has to raise rates when it did not think it would need to, and it ends up cutting rates when it did not think it would be cutting. But how much does it matter? The market anticipated at least four rate cuts in 2023. They didn’t happen, and yet the market set record highs. It expected four to six rate cuts at the beginning of this year. That’s now been ratcheted back to expectations of one or two cuts, and I still question whether that will happen.

But the economy continues to move forward, because it’s not as sensitive to interest rates as it once was. Forty percent of homeowners don’t have a mortgage, and 95% of those who do have their rates locked in – mostly at historically low levels. Most businesses also locked in low rates on their debt, leaving them less interest rate sensitive as well. Furthermore, we continue to see plenty of fiscal stimulus in the economy, and that isn’t likely to change ahead of the election. It’s estimated that the Treasury Secretary has about $1 trillion of cash at her disposal, with expectations by some that she will be able to use up to three-fourths of that this year to help stimulate the economy ahead of the election. That should help the economy continue to move forward, and if it does, reduce the need for a cut. The last jobs report trended toward a weakening employment sector, but it was by no means reflective of an employment problem justifying a rate cut. However, it does raise hopes on Wall Street that we will see “bad news” for the economy to justify rate cuts that really don’t matter as much as they once did.

Chinese soybean buyers were active again last week, buying roughly 22 cargoes of mainly Brazilian soybeans for shipment primarily in May and June. That keeps a steady pace of soybeans flowing from Brazil to China, despite all the reports of damage in Rio Grande do Sul from persistent rains in that region. Keep in mind that most of Brazil’s crop has already been harvested, with the exception of roughly 6 mmt of soybeans in the far southern state of Rio Grande do Sul. Some portion of those soybeans will be lost – let’s say 1 to 2 mmt. Much of the rest may see quality problems. But in a worst case scenario, what is the impact of 5 mmt being lost? That would essentially drop Brazil’s crop size to 150 mmt, which is essentially where our StoneX Brazil estimate is currently. Market bulls want to use CONAB’s lower estimate as a starting point, but Brazil’s cash market is behaving more like Brazil’s crop size is closer to USDA’s number. Meanwhile, harvest is slowly progressing in Argentina. The bottom line is that, despite problems in southern Brazil, and harvest delays in Argentina, we’re not seeing any impact on U.S. exports to this point. And if we do, will it be enough to suggest that we will run out of exportable supplies if we don’t raise prices to ration demand? Thus far, evidence of such is still lacking, suggesting that this is yet another rally in cash prices provided for the U.S. and Brazilian farmer to catch up on sales.