Perspective: Morning Commentary for December 18

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 18 – Wall Street reversed course from Tuesday’s activity, with stock futures and most commodities bouncing ahead of today’s anticipated policy statement from the Federal Open Market Committee. The VIX is trading near 16 this morning, reflecting a slightly elevated level of nerves on Wall Street, while the dollar is trading near 107.0. Treasury yields are strong ahead of today’s Fed statement despite expectations that the central bank will cut its benchmark rate by 25 basis points, with yields on 10-year Treasuries trading near 4.40%, while yields on 2-year Treasuries trading near 4.22%, with the yield curve slowly steepening. Crude oil prices are 1% higher this morning, while the grain and oilseed markets were mixed.

The Federal Reserve is scheduled to release its revised monetary policy statement, along with updated economic and policy projections at 2 p.m. Eastern Time today, followed by a press conference with Fed Chair Jerome Powell 30 minutes later. The market has priced in a 25-basis point rate cut, combined with hawkish language to prepare the market for a pause in rate cuts as we head into next year. Previous Fed projections included 100-basis points of additional cuts in 2025, but those projections are expected to be significantly pared back in today’s estimates. I also look for the Fed to further reduce, or even halt its program for reducing the balance sheet – withdrawing stimulus from the economy – by the end of the second quarter of next year, if not sooner.

An agreement has been reached to keep the government funded until March 14^th if both the House and Senate can successfully convince its membership to vote for the measure. A partial shutdown of the government would be expected to occur at midnight Friday night if the continuing resolution fails to pass. Wall Street typically expects Congress to come through at the last minute, and traders aren’t generally afraid of short-term shutdowns either. But they do pay attention to the political theatrics and choices made, and their implications for the economy and for our fiscal debt credit ratings. Democratic and Republican leaders reached the agreement on the measure that would include $100.4 billion in emergency funding to assist Southeast states impacted by this fall’s hurricanes, as well as western states impacted by wildfires, as well as other recent disasters. The measure would include $29 billion for FEMA and $21 billion for farmers as it now stands. It would also reportedly include language that “allows” the year-around sale of 15% ethanol blended gasoline known as E-15. A one-year extension of the Farm Bill has also been attached to the stop-gap spending measure. The bill, as it now stands, would be expected to keep this year’s $6.2 trillion deficit steady at its current level, requiring Congress therefore to also have to quickly deal with the debt ceiling early next year. The stop-gap measure must pass both the House and Senate where it will face opposition and attempts to change the language in various portions of it.

Housing starts fell to an annualized rate of 1.289 million units in November, down from 1.312 million in October, and down from analyst expectations of 1.340 million. However, permits for new housing builds rose to an annualized rate of 1.505 million in November, up from 1.419 million in October and above analyst expectations of 1.430 million. A breakdown of the data shows that single-family housing starts rose 6.4% month-on-month, but multi-family housing starts dropped notably, and they are down nearly 28% year-on-year. The housing sector continues to be an area of challenge for the Federal Reserve. Shelter costs make up the largest portion of the consumer price index 37%. We still have a significant shortage of housing in this country, which causes prices to remain near record high levels, despite the housing industry being in a recession over the past couple of years. New potential buyers continue to wait for those long-promised lower interest rates, but rates have been trending higher rather than lower. This continues to keep these buyers on the sidelines, although the rise in new permits suggests that perhaps the November election gave these consumers a boost in confidence to go ahead and start the process toward building a new home. This shift in confidence may be good for single-family home sales, but it means that demand for multi-family units may be in decline.

Brazil’s soybean crop estimates continue to get bigger – marching deep into the 170s million metric ton range. In the end, we may see Brazil’s year-on-year soybean production increase match the total of what we sold to China over the past year. The past week’s collapse of Brazil’s real makes its new-crop soybeans extremely price attractive to China, as well as to other buyers after the turn of the calendar year. That combines with ongoing expectations that green diesel production will plummet when we turn the calendar, significantly dropping demand for soyoil as new crush facilities come on board. Edible oil prices and meal prices both are falling, with soybean prices following, providing a drag on corn and wheat prices that are trying to hold areas of chart support. Abundant supplies of soybeans and their products are expected to weigh on the soybean / corn price ratio going forward.

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Perspective: Morning Commentary for December 18

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