Perspective: Morning Commentary for November 8

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

November 8 – Stock futures consolidated lower following this week’s election and Fed drama, as traders took a breath following an active week in which many uncertainties of past week’s were laid to rest. We now have a much clearer picture of the political landscape going forward, and a bit clearer picture of what monetary policy will look like, although that will continue to be a point of discussion on Wall Street. The VIX traded to its lowest level in six weeks below 15 overnight, while the dollar index bounced following yesterday’s weakness to trade near 104.7. Yields on 10-year Treasuries are trading near 4.31% as they continue to pull back following yesterday’s Fed statement, while yields on 2-year Treasuries are trading near 4.22%. Crude oil prices are 1% lower as Hurricane Rafael risks ease in the Gulf of Mexico, while the grain and oilseed markets had a mixed to weaker tone ahead of today’s monthly USDA WASDE crop report that should set the tone going forward.

The Federal Reserve cut its benchmark interest rate by 25 basis points as expected on Thursday. Fed Chair Jerome Powell stated that the election will not alter monetary policy direction in the near-term, but I don’t believe that members of the Federal Open Market Committee didn’t discuss potential implications as we move into 2025. There were clear differences in policy direction between Vice-President Harris and now president-elect Donald Trump. One can argue their merits, but this economy was going to be impacted one way or the other by who won on Tuesday, and the Fed is well aware of that. Powell was simply stating that policy makers have a few months to monitor that before altering direction. But Wall Street rallied this week because it expects lower taxes and regulations that will spur economic growth with Trump being in the White House, and the Fed knows that will alter its policy going forward. If it doesn’t, then they shouldn’t be serving at the Fed.

The Fed’s policy statement was pretty much as expected by Wall Street, with really no surprises. That had already been priced into the market. As such, market reaction came primarily from comments made by Powell in his press conference following the statements release. Powell still sees a worrisome labor market that seems to be his primary focus, with inflation still drifting lower. As such, he still holds to a base case of slowly and methodically moving toward a 3.25% interest rate by the end of next year. Nearly everyone on Wall Street expects that he will need to deviate from this base scenario in the months ahead, but he’s not going to acknowledge such at this time. To be fair, there are many unknowns yet that still need to play out.

There’s an assumption that Trump’s economic policy will create inflationary pressures that force the Fed to halt its rate cuts, or even reverse them. Those same assumptions fell flat in Trump 1.0, although his policies have a bit different twist to them this time around. Trump 1.0 resulted in strong economic growth prior to the pandemic with very little inflation. It will all come down to how he applies the tariffs. The use of tariffs can create upward price pressure, or it can spur economic growth that results in lower inflationary pressures, depending on how they are applied. They would generally be expected to boost U.S. manufacturing, which is one of the areas where the jobs market is hurting the most currently. Many firms indicated on industry surveys that they were waiting for the election results to make hiring and expansion decisions, so it will be interesting to see future job reports.

The U.S. fiscal debt is just short of $36 trillion currently, with annual interest payments topping $1 trillion. Congress and President Biden reached an agreement in June 2023 to suspend the debt ceiling until January 1, 2025. That agreement must now be revisited by a lame duck president and a lame duck Congress by the end of the year. I fully expect them to “kick the can down the road” once again, keeping it suspended until some time in the future. The question is, will the debate around this issue lead to another credit downgrade that would elevate interest rates. Keep in mind that the Fed only controls the short-term rate. That’s why we’ve been seeing longer-term rates trend higher as fiscal spending continues to soar. I don’t see President-Elect Trump doing anything to stop that trend in the near-term. He may halt some programs, but he’ll likely promote others. Our country still has a fiscal problem that I don’t see turning around in the near-term. That will create some challenges for the Fed going forward as well.

China announced more details of a $10 trillion yuan stimulus program today, as expected. But the bulk of the stimulus is designed to ease the debt burdens of local governmental units, from which China tends to fund stimulus programs. As such, it’s not direct stimulus, for the most part, although there are some segments of the program that do go directly to the consumer. As such, the program announcement was somewhat underwhelming. China promised more stimulus to come, but it’s assumed that additional announcements will likely be after Trump takes office once China is able to assess the direction of his Administration.

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