Perspective: Morning Commentary for October 8

October 8 – Stock futures firmed overnight ahead of inflation data and third quarter earnings reports due out later this week, along with indications that Iran-backed Hezbollah may be interested in negotiating a ceasefire agreement after being hit hard by Israel in recent days. However, gains were limited by active profit taking in China’s markets after an initial post-holiday rally, as government officials failed to provide the desired details of anticipated stimulus plans. The VIX is trading near 22 at this hour, after trading at one-month highs above 23 earlier in the session. The dollar index is trading near 102.4, consolidating just below seven-week highs. Yields on 10-year Treasuries are trading near 4.05%, after rising to their highest level since August 1^st, while yields on 2-year Treasuries are trading near 3.99%. Crude oil prices are nearly 3% lower at this hour on the Middle East peace talk chatter, as well as disappointment in a lack of details out of China regarding their stimulus program, but that comes after prices surged to fresh seven-week highs above $78 earlier in the session. The grain and oilseed market traded mostly lower overnight amid active harvest pressure for corn and soybeans, and rains in the forecast for dry areas of the Black Sea winter wheat belt.

Wall Street is back to guessing about what the Federal Reserve will do next, after a series of strong economic data led by Friday’s solid jobs report raised questions about the appropriateness of big rate cuts at a time when the economy is already rebounding. Various members of the Federal Open Market Committee continue to speak at public engagements, providing a mixed message to Wall Street once again, after the message seemed so clear on September 18^th when they surprised many with their 50-basis-point rate cut and talk of more ahead. Fed Governor Adriana Kugler stated today that she supports further interest rates if inflation continues to ease, as she anticipates that it will, but other officials, including John Williams and Alberto Musalem, simply stated that it would be proper to cut rates over time. This has traders rethinking their rate cut outlook – scaling back aggressive expectations for something more moderate, although they can’t ignore the fact that a resilient economy continues to push forward regardless. We’ll hear from Raphael Bostic, Susan Collins and Philip Jefferson later today, which may shed more light on the subject, but the bottom line is that Wall Street is back to the land of ambiguity regarding future rate policy, albeit with a bias toward lower rates. Traders just don’t know how quickly those cuts will come.

Israel seems to have the upper hand following its recent hits on Hezbollah’s leadership, its communication systems, and incursions into Lebanon. Last week’s Iranian missile attack on Israel simply made it more resolute to root out its enemies, and now Iran fears retaliatory attacks. Hezbollah’s deputy leader Naim Qassem spoke today of attempts to secure a truce, and for the first time did not indicate the need for Israel to stop its war on Gaza as a precondition to such a truce. We should be wary of thinking that the region is on the cusp of peace, although we can all hope for such. The conflict between the warring parties goes back to a family issue that has broiled for thousands of years – back to the days of Abraham. Israel is determined to defeat those who have promised its destruction for centuries, but that means dealing with Iran who is funding the conflict. The problem is, dealing with Iran raises the risks for the entire region, including the possibility of impacting energy and fertilizer assets in the region.

China’s stock market gapped sharply higher as it reopened following a week-long National Day holiday today that sent values to two-year highs. However, values then began eroding lower in profit taking after Chinese authorities spoke with more promises that lacked details. Traders have become wary of China’s promises of economic growth without substance to back it up. Stocks soared in the week ahead of the holiday when China said the right things, leading traders to believe that perhaps authorities would now finally do what was necessary to turn its ailing economy around. They still may do so. It’s widely believed that more stimulus will be coming as long as the U.S. Federal Reserve continues to cut rates here in the States. History would tell us that such stimulus – if it happens – will increase demand for commodities. That would be expected to include those commodities essential for construction and for technology, but food and energy-based commodities as well. However, that demand tends to take some time to develop.

Rapid harvest progress translates into corn and soybeans struggling to find storage space, pushing bushels onto the market. Forecast rains in the Black Sea Region won’t end the drought, but they could help crop establishment if they verify. Meanwhile, Hurricane Milton is targeting significant phosphate production facilities in central Florida, along with citrus groves. Center-West Brazil rains are starting to fall. They’re not as heavy as farmers prefer, but they still look like they’ll be sufficient to start the growing season, with the locals still talking about a record soybean crop, although they quickly say the delayed planting will raise risks for safrinha corn six months from now.