Suderman says: Financial markets relaxed despite inflation fears

Bearish inflation data created an even stronger argument for a hawkish monetary policy, Treasury yields rose, the Tech sector was under specific selling pressure, and oil and commodity prices were higher. Generally, equity markets have remained remarkably sanguine in the face of this news.

Equity markets calm on bearish inflation news, but Treasuries fall

• The Tech sector was under specific selling pressure, but the broader Dow Jones index remained in positive territory
• The VIX, Wall Street’s fear index, fell to 19, reflecting a calmer outlook
• Yields on 2-year and 10-year Treasuries were trading at recent highs, 4.92% and 4.08% respectively
• The dollar index was stronger, trading up to 105.0, above lows earlier this year
• Crude oil prices were nearly 1% higher late this morning, reflecting political worries
• Soft commodities including grain and oilseed markets were pushing notably higher in active trading

Employment data negative for inflation outlook, arguing for hawkish interest rate outlook

• Higher wage inflation appears to be due in part to lower productivity, not just higher pay
• Nonfarm productivity grew at an annualized rate of 1.7% in the fourth quarter of 2022, well-below an anticipated 2.5%
• Unit labor costs soared to a 3.2% growth rate, more than twice the anticipated 1.4%
• The four-week moving average of unemployment benefits climbed to 193,000 claims, up modestly despite some high-profile layoffs in the Tech sector
• Continuing claims for the week ending February 18 totaled 1.655 million, down slightly

Markets bet on higher (not lower) rate moves

• Financial markets, notably Treasuries, are becoming impatient on the Fed’s credibility to stave off inflation, evident in strong labor market and service sector data
• The next policy statement from the Federal Open Market Committee is scheduled for March 22, and the next move in rates could be up – maybe at a faster and larger rate
• Fed Fund futures, the market’s bet on official interest rates, are expecting a peak at 5.5%, up a point from today, with the odds favoring a 25-basis points rate hike soon but some looking for 20-basis points
• Wall Street worries about the pain that those rate hikes might cause the US economy, creating potential headwinds for the stock market and creating demand worries within the commodity sector

Soft commodity prices lifted by war, stronger demand and fear of lower supplies

• We are not seeing a very strong seasonal pick up in corn demand in the face of supply disruptions
• There's more skepticism today about whether we will see an extension of the grain trade initiative with Ukraine, with Russian motives being mistrusted
• Nonetheless, rumors of Chinese buying provided support for corn, and soybeans found support from lower private production estimates from Argentina

Analysis by Arlan Suderman, Chief Commodities Economist

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