Perspective: Morning Commentary for October 1

October 1 – Port workers are on strike and Powell is sounding hawkish again. Those factors contributed to a mixed to weaker sentiment in stock futures overnight, ahead of a series of key labor reports to be released the remainder of the week. The VIX is trading near 17 this morning, while the dollar index rallied to trade near 101.2. Yields on 10-year Treasuries are trading near 3.74%, while yields on 2-year Treasuries are trading near 3.63%. Crude oil prices are 1% lower, although a dollar off their session lows, at this hour, while the grain and oilseed markets mixed following yesterday’s set of USDA reports.

Federal Reserve Chair Jerome Powell sounded much more hawkish on Monday when he spoke at a conference in Tennessee than what he did in his press conference two weeks ago following the Federal Open Market Committee’s 50-basis point rate cut. “This is not a committee that feels like it is in a hurry to cut rates quickly,” stated Powell. He didn’t close the door to additional 50 basis point cuts if the economic data would suggest that such is warranted, but Powell made it clear that he thinks that the markets are overly excited about upcoming cuts. I would argue that Powell is responsible for that rate cut euphoria in the markets, but he is now trying to tamp it down. His comments suggest that the committee leans toward 25-basis point cuts from this point forward, until / unless the data suggests otherwise. That data he refers to would seem to primarily be data tied to the labor market, since Powell has made it clear that the FOMC’s focus is now more on the employment mandate than on the inflation mandate. That starts with the JOLTS report later this morning, followed by the private sector ADP employment report tomorrow, the weekly jobless claim numbers on Thursday, and the government’s monthly jobs report on Friday. For now, Fed fund futures are pricing in a 25-basis point rate cut in November, but they’re also still pricing in 75 points of cuts by December. This week’s data could sway that one way or the other. As for the commodities, a slower rate cut path would likely cool reinflation talk somewhat, perhaps slowing some of the speculative buying that we’ve seen in the commodities over the past couple of weeks.

Port workers walked off the job from Maine to Texas early today, beginning a historic strike involving 45,000 workers at 14 major ports. The primary questions are, how long will this strike last, and what will it cost? Even a short strike will have a significant impact on the U.S. economy, but a prolonged strike could provide a significant drag on the global economy as well. President Biden has repeatedly said that he will not intervene. After all, the labor unions are a key block that Democrats are counting on in this election. However, he also can’t afford to see the economy take a sharp downturn ahead of the election, putting his Administration in a tight spot. Global supply chains have already been hit hard this year with the Houthi Rebels attacking ships in the Red Sea, causing many shippers to take the long route around Africa. A lengthy drought squeezed down the Panama Canal to minimal traffic, and the Baltimore bridge collapse added problems as well. Escalating tensions in the South China Sea could disrupt trade in that key trade route as well. Each of those factors resulted in longer freight times that increased costs. This strike will no doubt do the same, with port workers asking for a 77% pay raise over the next six years, while demanding a halt to automation that could replace high paid workers with more cost-effective machines. Costs are going up. It’s just a question of timing, and by how much?

China got what it wanted. It beautifully orchestrated stimulus policy announcements and stock buying by state-backed funds to turn the tide of selling into euphoric buying in its stock market ahead of its National Holiday that stretches from today through next Monday. Foreign Direct Investment was down by more than 30% and consumer sentiment was near record lows prior to the past week’s announcements. A sense of hope is returning among consumers, and foreign investors are again lining up to place their bets on the Chinese economic recovery. Chinese authorities may not have shown the most skill in managing their economy in recent years, but they have mastered the art of controlling the message, and in this case it has worked. The key now is for them to maintain the momentum through the holiday period, with strong consumer buying, followed by sustaining the flow of foreign money coming into China. That’s going to take substance behind the policy announcements, or the money could quickly exit again, leaving China in worse shape than it was before, with even less hope in the consumer.

Brazil’s Center-West growing areas see rains in the forecast starting late in the 10-day period. Most areas of Center-West Brazil are now expected to get 1 – 3” of rainfall in the latter half of the 15-day period, which if it verifies, would spur rapid planting of the soybean crop and keep hopes of a big crop alive. That still leaves the winter corn crop at risk, as it would likely be planted a bit later than desired, but it would ease concerns about soybeans. Monday’s USDA stocks report found less corn than expected, but the bigger focus is on this year’s U.S. crop size.