Perspective: Morning Commentary for March 28

March 28 – Stocks remain in a sluggish mode ahead of the holiday weekend, and ahead of the end of the fiscal quarter today, with traders looking ahead to Friday’s PCE inflation data. However, the markets will be closed on Friday for the Good Friday Easter holiday, meaning that they won’t be able to trade Friday’s data until Monday’s session. The VIX continues to trade near 13 this morning, while the dollar index is trading near 104.4, after setting fresh two-month highs above 104.7 earlier in the session. Yields on 10-year Treasuries are trading near 4.21%, while yields on 2-year Treasuries are trading near 4.61%. Crude oil prices more than 1% higher this morning, while the grain and oilseed markets are mixed ahead of today’s reports from USDA.

First-time claims for unemployment benefits slipped to a low 210K in the week ending March 23, down from 212K the previous week, and below analyst expectations of 213K claims. That dropped the four-week moving average to 211K claims, down from 211.75K the previous week. Continuing claims for the week ending March 16 rose by 24K to 1.819 million. The four-week moving average for continuing claims increased by 3,500 during the week, but that still leaves it at a low 1.803 million. The job market remains tight, keeping upward pressure on wages, which presents a problem for the Federal Reserve trying to bring inflation down to its 2% mandate.

Gross domestic product grew at an annualized rate of 3.4% in the fourth quarter of 2023, according to today’s third reading of the data. That’s up from 3.2% in the second reading, and above analyst expectations of 3.2%. This is largely due to personal expenditures rising by 3.3% in the fourth quarter, up from 3.0% in the second reading and above analyst expectations of 3.0%. Other related data released this morning indicated that corporate profits rose 8.6% year-on-year in the fourth quarter, after being up just 0.1% in the previous quarter.

The bottom line is that the economy remains solid. There is no reason for the Fed to cut interest rates when the overall economy is doing well. Doing so can simply provide further fuel to the economy to increase risks of reinflation. That’s consistent with comments coming from the Fed prior to its statements emerging from the March meeting. However, its comments emerging from the March meeting made clear that the Fed fully intends to cut its benchmark rate anyway – likely in June – as it succumbs to outside pressures to do so. I still do not believe that there will be three cuts this year, but I believe that it will cut at least once, regardless of the data. We’ve been above the 2% mandate for three years, so the Fed is essentially communicating that such does not matter, and it is willing to risk reinflation, despite all of its stated fears over the past couple of years that it will guard against that occurring.

China continues to release soybeans onto the domestic market from its reserves as it waits for adequate new-crop supplies to arrive from Brazil. Officials will offer their third batch of 8.1 million bushels onto the market at auction tomorrow, after previously releasing 23.9 million bushels over the previous two weeks. That exceeds the pace of initial expectations that officials would release 22 – 29 million bushels per month onto the market. The shortfall was created when buyers chose to buy fewer U.S. soybeans to fill the shipment void this year. This is something that I warned about six months ago when China was aggressively building supplies of cheap Brazilian soybeans, with shipments exceeding the crush pace at that time.

Today’s commodity focus is on a set of reports due to be released from USDA. The first of these is the quarterly grain stocks report at 11 a.m. Chicago time, in which USDA provides a snapshot look at available stocks of the major grain and oilseeds existing as of March 1. This data is expected to show a healthy growth of supplies over the past year for corn, soybeans and wheat. Simultaneously, USDA is expected to release the results of its producer planting intentions survey for the upcoming growing season. That report is expected to show a modest shift in acreage away from corn and wheat toward soybeans, cotton, and rice. Both of these reports are known for their market moving surprises, and the direction of the surprises often defy logic in the stocks report. Later this afternoon, USDA will release the results of its quarterly hogs and pigs survey, which is expected to show a continued shrinkage of its breeding herd, offset again by growth in pigs per litter to sustain production. The latter report comes after the markets are closed, meaning it won’t be traded until Monday. The former two reports will be first traded by the Algos in the seconds following their release, but pay more attention to where we close, rather then the initial reaction. Meanwhile, rains continue to fall in Brazil. The April outlook remains dry, but the rains are still falling for now.