Perspective: Morning Commentary for February 20

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

February 20 – Stock futures were modestly lower again overnight, amid more talk of tariffs from President Trump, as well as a sobering message of uncertainty from the Federal Reserve found in the minutes of its latest meeting that were released on Wednesday, and a disappointing profit outlook from Walmart. The VIX continues to trade near 16 this morning, while the dollar index trades lower near 106.8. Yields on 10-year Treasuries are trading near 4.51%, while yields on 2-year Treasuries are trading near 4.26%. Crude oil prices are modestly higher again this morning, while the grain and oilseed markets were modestly higher overnight.

First-time claims for unemployment benefits rose modestly to 219K in the week ending February 15, up from 214K the previous week, and above analysts expectations of 215K claims. However, the four-week moving average slipped to 215.25K claims, down from 216.25K the previous week. Continuing claims for the week ending February 8 rose by 24K to 1.869 million, while the four-week moving average fell by 7,750 to 1.862 million. We’re watching this data for notable signs of increased unemployment due to the Trump layoffs of federal employees. Today’s data revealed that claims filed by federal civilian employees totaled 613 in the week ending February 8, up 14 from the previous week. The Department of Labor reports that there were 399 initial claims filed by newly discharged veterans, a decrease of 66 from the previous week. Furthermore, there were 7,110 continued weeks claims filed by former federal civilian employees in the week ending February 1, which was a reduction of 335 from the previous week. Newly discharged veterans claiming benefits totaled 4,405, which was a decrease of 202 from the prior week.

The Philadelphia Fed manufacturing index fell to 18.1 in February, down from 44.3 in January and below analyst expectations of 22.7. The Philadelphia Fed noted that manufacturing activity continued to expand in its region, albeit at a slower pace in February. Its survey readings for current general activity, new orders, and shipments were all lower than the previous month, but all three still remain elevated overall. The employment index also slipped, while still remaining positive. Both prices paid and prices charged rose in February, and they remain above their long-term averages. The surveyed firms continue to expect growth over the next half year, although those expectations were less widespread than they had been previously.

The Federal Open Market Committee released the minutes of its January meeting on Wednesday, providing insight into the policy discussions at that meeting. The minutes reflected elevated concerns about Trump’s tariffs putting upward pressure on inflation going forward, although members also acknowledged that some of those inflationary pressures could be offset by pro-business policies including tax cuts and deregulation. But the bottom line is that the Federal Reserve is highly unlikely to be in a hurry to make additional rate cuts until it sees how the barrage of Trump policy changes will impact the economy. As such, the markets are currently pricing in just one more rate cut this year, and a rate hike cannot be ruled out.

Chinese observers took note that the United States is paring back on diplomats working in China by 10%, even as it increases its direct communications with Russia. That further feeds fears in China that the United States is moving closer to an alliance with Russia for the purpose of isolating China in global diplomacy. I continue to emphasize that none of the three trust each other, and each has a distinct set of values that are different from the others. Russia leaned on China in the Ukraine war, as it needed an ally against the West. However, Russia also doesn’t trust the long-term intentions of China just to its south. It’s interesting to note that the latest major BRICS meeting that was hosted in Moscow failed to endorse China’s plan for an alternative banking system based on the yuan. Global geopolitical alignments experienced a seismic shift when the Ukraine war started. China took advantage of that shift. Now it fears that another shift may occur if the war comes to an end via Trump negotiations. Otherwise, it should be noted that China’s central bank kept its benchmark lending rates unchanged at 3.1% for 1-year loans and 3.6% for 5-year loans. It’s economy could certainly benefit from more rate cuts, but Chinese policy clearly reflects efforts to sustain the yuan on the global currency markets, and the failure of the U.S. Federal Reserve to make further rate cuts anytime soon ties the hands of China being able to make the stimulative cuts that it needs to make for fear that it would further weaken its currency. Foreign direct investment in China was down another 13.4% year-on-year in January, after being down by 27.1% for all of 2024.

The grain and oilseed markets continue to see fund buying on the breaks, although corn as the leader faces some significant areas of chart resistance just above the current market that could prove pivotal. Prices continue to trade near recent highs despite a waning South American weather story as fund managers build ownership.

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