The U.S. Federal Reserve's actions have undoubtedly had a significant impact on the economy with actions involving higher-for-longer interest rates to a reduced balance sheet – as the national debt continues to swell, posing a risk to credit markets.
To further understand the Fed’s monetary policy effects, StoneX’s Chief Commodities Economist, Arlan Suderman, dove into several economic indicators worth looking into: The latest CPI print and the monthly WASDE report from the U.S. Department of Agriculture.
Here’s what Suderman said he is watching closely, including the potential for a hot and humid Midwest and whether inflation will cool enough for the Fed to begin easing.
The Federal Reserve’s updated dot plot on June 12th pointed to a single rate cut of 25 basis points in 2024, quite a shift from forecasts released in March, where it projected three cuts.
With the U.S. national debt at levels exceeding $34 trillion and growing, the potential for problems in the credit market lingers.
“They (Fed officials) say the most likely next move will be a rate cut. There's nothing in the economy right now, pushing them to do a rate cut,” Suderman said, pointing to the latest last mile of bringing inflation down to the central bank’s target of 2%.
While one may think inflation will continue to cool, nothing is certain. There is also a risk of reinflation – as a strong U.S. dollar adds near-term headwinds alongside fiscal decisions from Capitol Hill and ongoing geopolitical tensions in the world.
“We’re seeing a lot of ebb and flow right now in this transition period between funds who think that inflation is coming back and those who think that it’s going to continue to trend lower,” Suderman said.
Weather forecasts driving varying market scenarios lie ahead for summer 2024.
One aspect worth paying close attention to is a stretch of heat expected to affect the waters surrounding the Gulf of Alaska, which would set up high pressure in the Southwest and lead to cluster storms across the Midwest.
There is not yet evidence of immunity to weather problems this summer, Suderman notes, adding that more clues are expected to come in the weeks ahead, such as the annual Acreage and quarterly Grain Stocks reports to be released on June 28.
The outlook for crops is mixed, having seen improved soil profiles despite dry pockets and raised yield estimates from the USDA amid production estimates for corn and wheat flat, while soybeans face slowing exports and buyer hesitation.
While monetary policy and weather are carefully monitored, additional factors are also under the spotlight, such as the Black Sea Grain Initiative amid the ongoing Russia-Ukraine conflict. Another issue closely followed is Brazil’s currency fluctuations as new tax laws are to be introduced to its economy.
Looking ahead to the July WASDE report and crop production numbers, Suderman notes the data would likely provide further clarity on the amount of lost production from Ukraine.
Overall, the theme of commodity deflation is “ebbing and flowing,” he said.
Stay ahead with StoneX’s Commodity & Economic Outlook by signing up for this webinar series or watching previous full episodes on-demand.
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Dry soil is slowing winter wheat planting in Russia and Ukraine, with a third of Ukraine's area in moisture deficit. Lost export revenue and costly diesel add a second risk to the size of the next Black Sea wheat crop.
September 23 – The Nasdaq hit another fresh all-time high yesterday, with the S&P 500 close to doing so as well, though stock futures are pointing to a quietly lower start to today’s session after surging higher to start the week as optimism surrounding this week’s various diplomatic pushes abounds. That optimism continues to be reflected in the VIX, continuing to hang around roughly three-week lows, trading at 14.3 this morning. The dollar is surging higher, adding to the week’s gains, as it nears the 101 mark for the first time in nearly two months. Treasury yields are off to a higher start, with 2-year yields back up to 4.80%, 10-year yields at 4.99%, and 30-year yields just above 5.32%. Crude oil prices are looking to hold their ground after a steady decline since late last week, with nearby WTI up 1.3% to trade near $91 and nearby Brent up 1.4% to trade near $100.65 at the time of writing. The ags are mostly lower to start the day, likely influenced in part by managed money selling off some existing length amid hopes for improvement regarding commodity flow through the Black Sea as part of this week’s diplomacy blitz.
September 22 – The Nasdaq and S&P 500 both closed within 1% of their all-time highs yesterday, with stock futures pointing to a quietly higher open at the time of writing. Diplomacy continues to be the theme of the week, with markets pricing in optimism, particularly in the tech sector following encouraging results from the weekend’s meeting between U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng. It’s also worth noting that Bessent yesterday announced the two sides would be meeting again to discuss AI safety and communication protocols in Shenzen, China in about two months, another potential sign of cooperation instead of escalation. The VIX continues to reflect optimism regarding this week’s various diplomatic pushes as it hovers near its lowest level since early September, starting the day trading just below the 14.7 mark. The dollar is sitting just above unchanged, near 100.46 at the time of writing, touching a fresh two-month high earlier this morning. Treasury yields are quietly lower to start the day, also helping bring some calm to Wall Street, with 2-year yields at 4.747%, 10-year yields at 4.949%, and 30-year yields at 5.279%. Crude oil prices continue their push lower, with nearby WTI down another 1.8% to trade near $90.30 and nearby Brent down 1.6% to trade near $98.70, both roughly two-week lows. The ags are looking at a turnaround Tuesday to kick off the session with most of the complex in the red at the break, led down by the wheat complex. Improving forecasts for planting conditions for the U.S. winter wheat crop are likely having some influence, but I’d also point out the signs of potential increasing U.S. pressure on Ukraine, which we’ll dive into in more depth below, possibly spooking out some managed money length.
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