Perspective: Morning Commentary for September 16

September 16 – A cautious tone remains in place across Wall Street to start Fed week, as traders position for Wednesday afternoon’s monetary policy statement from the Federal Open Market Committee. Fed fund futures trading priced in just 14% odds of a 50-basis point rate cut on Thursday of last week, but that soared to 47% at one point on Friday morning, and it is traded near 65% odds this morning, with just 35% odds of a 25-basis point cut. Chatter emerged Friday that the Fed may have leaked out intentions to cut its benchmark rate by 50 basis points to avoid surprises with this week’s announcement. That chatter still cannot be confirmed, but we at StoneX first told you earlier last week that the Fed had shown some interest in frontloading the rate cuts. I disagree with such a move, but the decision is in their hands – not mine.

A 50-basis point rate cut risks re-emerging inflation pressures at a time when fiscal stimulus remains high, as evidenced by the strong monetary base still in the economy. It also risked sending a message to Wall Street that “the economy is in worse shape than believed.” A leak from the Fed, if that’s what it was, could be an effort to avoid the latter by preparing the market for such a cut as merely “catching up” with needed policy. We need to prepare for the possibility that the Fed may be more aggressive in its rate cuts, as the markets will start expecting another 50-basis point rate cut at the next meeting if they get one this week. The market is already pricing in the possibility that we could see 225 basis points of cuts by the June meeting, taking us down to 3%. First, a rapid closing of the gap between U.S. and Japanese yields – they’re prepared to raise rates again soon – could trigger more yen carry trade unwinds. There’s currently a debate on the quantity of those still in play. Second, it could trigger a boom in consumer demand for durable goods and housing, with housing prices already at record high levels.

Stock futures are mixed as we start the new week, with the VIX trading near 17, and the dollar index trading near 100.6. That puts the dollar index just above one-year lows, with a triple bottom on the charts. Yields on 10-year Treasuries are trading near 3.66% this morning, while yields on 2-year Treasuries are trading near 3.58% - quite a change from the inversion of the past couple of years. Crude oil prices are 2% higher, with roughly a fifth of Gulf crude oil production still offline following Hurricane Francine, while the grain and oilseed markets were mostly weaker in overnight trade. The crude oil market is watching this week’s Fed meeting very closely. A larger rate cut that would provide greater stimulation of the economy would be expected to boost demand for energy.

Gold prices continue to post fresh record highs on lower interest rate expectations. Historically, gold has been a popular asset during times of turmoil in the world, and we certainly have that. Rising geopolitical tensions in several parts of the world, combined with U.S. election uncertainty, certainly add to that turmoil. A second assassination attempt on former President Donald Trump over the weekend adds to that uncertainty. Historically, gold has also been a popular asset in times of low interest rates, when people start talking about inflation risks. We’ve been in a period of primarily commodity deflation over the past couple of years as the Federal Reserve pushed interest rates higher to push inflation down. The question is, will a reversal in Fed policy – particularly if it overreacts with its cuts amid ongoing fiscal stimulus – result in a return of commodity inflation as demand surges once again?

The grain and oilseed markets pulled back overnight, following recent solid gains. The market feels greater confidence now that it has priced in the size of the big Midwest corn and soybean crops, after USDA’s yield estimates were little changed from August, and similar to private estimates. We’ll see an increasing flow of harvest results in the days and weeks ahead to provide guidance, while traders will also be increasingly focused on export sales and shipments, as well as South American weather. It’s still quite dry in Center-West Brazil, although rains are increasing for southern Brazil. In fact, parts of southern Brazil are seeing flooding problems. But the primary focus remains on when the monsoon rains will return to Center-West Brazil to facilitate planting of the 2024-25 soybean crop. Timely planting is needed so that the 2025 winter (safrinha) corn crop can be planted in a timely manner. The European weekly forecast models consistently called for several weeks for normal to above-normal rains to return to Center-West Brazil by the first week of October. That would be later than preferred by farmers there, but still in time to allow for good crops. Those models turned drier over the weekend, but not dry, supporting futures this morning. We’ll need to monitor the trend, but they’re now calling for normal rains in early October, rather than normal to above-normal rainfall. They suggest that the region could see 2 – 3” of rainfall in the first three weeks of October. That’s enough to support planting and emergence of the soybean crop if the current forecast verifies. Our team in Brazil is still focused on expectations of a normal soybean crop in Brazil, with production north of 165 million metric tons, up from 149 mmt the previous year.