Perspective: Morning Commentary for May 2

May 2 – Stock futures reflected an upbeat sentiment on Wall Street following the release of yesterday’s Federal Reserve monetary policy statement. The VIX is trading near 15, while the dollar index is trading near 105.7. Yields on 10-year Treasuries are trading near 4.65%, as they recover a portion of yesterday’s losses, while yields on 2-year Treasuries are trading near 4.95%. Crude oil prices are modestly higher this morning, trading just above yesterday’s seven-week lows, while the grain and oilseed complex was solidly higher overnight.

The Federal Open Market Committee acknowledged that progress toward bringing inflation down to the 2% mandate had stalled in the first quarter of the year. Fed members truly believe in their heart of hearts that current policy is restrictive enough to take us down to the 2% mandate, despite ongoing fiscal stimulus. Fed Chair Jerome Powell stated that, “We will return inflation to 2% over time” while adding, “the Fed’s policy stance is appropriate to do that.” Forgive me for being skeptical, but we’ve been above 3% for three years. How much longer does he expect it to take to get to his 2% mandate? I ask again, is the Fed really committed to the 2% mandate, or is it afraid to admit that it has adjusted its expectations upward? Powell stated that the policy committee’s discussions focused on holding the current level of restriction. He has essentially ruled out a rate hike, which was good news to the market, giving added confidence to both investors and to consumers.

The bottom line is that it will be very difficult to justify a rate cut ahead of the election unless we see a sharp downward turn in the economy / labor market. Any such move would otherwise appear political in nature, as would a rate cut immediately after the election in November, and a cut would be even more stimulative. Stocks took their cue from something else that I warned about ahead of the meeting – the move to reduce the rate at which we are shrinking the balance sheet. I thought that the Fed would use this meeting to prepare the market, and then enact it at the June meet, but instead it jumped right into slowing the rate of tightening. The previous plan had the Fed reducing its purchases of debt certificates by $1.14 trillion, but that is now reduced to $720 billion per year. Look for that number to continue to ratchet lower in future meetings. That move is actually somewhat stimulative in the near-term, as it provides more buyers to match the increased supply of debt certificates being offered onto the market, reducing upward pressure on interest rates toward the longer end of the yield curve. That’s why we saw the big drop following the announcement yesterday, although note how yields bounced back overnight. The volume of debt certificates offered to the market is expected to rise by one-third across the yield curve this year over the previous year, which means that more buyers need to be added to the market to avoid rising yields.

Powell clearly wanted to send a message that investors and consumers should not worry about a rate hike. He clearly stated that, “It’s unlikely that the next policy rate move will be a hike.” In other words, expect a cut before we see a hike. That statement is also stimulative in nature, suggesting that Powell is clinging to his dovish tone, despite previous statements that progress toward the 2% mandate has stalled. He’s taken steps to make sure that Wall Street confidence remains intact, and that the credit markets continue to function. In fact, he totally dismissed the idea that the central bank’s dovish pivot had anything to do with the recent reinflation pressures, even though the data suggests otherwise. The economy runs on consumer confidence, which is driven primarily by the stock market and the price of food and gasoline. The stock market liked Powell’s comments, which should boost consumer confidence, and therefore consumer spending. Food and gasoline prices may very well hinge on rising geopolitical and weather risks. Let’s keep in mind that we’re entering what forecasters expect to be a very active hurricane season, which adds to crude oil supply risks, on top of the geopolitical risks already in place. According to Powell, all is well, but please don’t look behind the curtain.

Powell’s statements came after the grain markets closed, but they reacted positively to the comments overnight. We’ll have to see how that positive momentum holds in today’s trading, but history suggests that fund managers prefer to be long commodities rather than short during times of rising inflation. We had already seen fund managers reducing their short positions in the grain and oilseed complex in recent weeks, while they had already done so in the energy sector previously due to rising geopolitical risks. That trend in the grain and oilseeds continued overnight as the dollar slipped lower. The overnight rally comes despite bearish news in the biofuel sector as the new guidelines for corn and soybeans qualifying as a feedstock for Sustainable Aviation Fuel were unveiled, essentially blocking the bulk of them from qualifying for the subsidies. Price strength also came despite some increased moisture possibilities for dry wheat areas of the Plains and for southern Russia. Money flow into the sector is positive to start the day. Now we’ll see if it can stay that way long enough to garner additional chart-related strength.