Markets tread water, with Oil and Gold higher

The health of banks remain in focus on Wall Street, as traders monitor Congressional hearings on the recent bank failures. Wall Street seems to accept that pain is an inevitable product of the Federal Reserve’s monetary tightening designed to break the back of inflation. Financial markets were marginally lower, awaiting new data points on inflation, rates or the health of the banking sector.

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Slaying the inflation beast

Several years of fiscal and monetary stimulus wasn’t just a ‘free lunch’ for America’; it was a veritable feast which also fed inflation. We fed the economy with the trillions of dollars of stimulus cash; the Fed’s job is to put the inflation beast back in the cage before it’s too big to fit through the cage door. The larger the beast gets, the harder it is to fit it back into the cage door, and therefore the more pain that must be inflicted. Markets are debating the speed at which the Fed can control the inflation beast, and how much pain it while cause to the banking system.

The Fed’s program for caging the beast exposed problems within some banks that largely went unnoticed when money was cheap – near zero interest rates. To quote the legendary sage of Omaha, Warren Buffett: “Only when the tide goes out do you learn who has been swimming naked.” While the Fed didn’t cause these problems, it did expose them. Regardless, the Fed can’t afford a collapse of confidence in the banking system in the middle of trying to cage the inflation beast. It must now manage both problems at the same time.

Paul Volker, legendary Fed chair from 1979 to 1987, took extreme actions to cage the inflation beast four decades ago. Interest rates peaked at 21.5% in 1981, to curb inflation which peaked at 14.8% in 1980. A painful recession was experienced between 1980-1982.

This time around, the Fed is trying to find a middle ground, in which rates don’t rise so high and the economy doesn’t fall so hard – but it isn’t easy. There will be rough spots, and there will likely be good times. But ultimately, we must slay the inflation beast.

Financial markets tread water

• The broad S&P 500 index was down 0.6% at 3,955, and the tech heavy NASDAQ was off 0.9% at 11,656
• The VIX, Wall Street’s fear index, edged up to 20.9
• The dollar index fell 0.4% to 102.5, with £/$ 1.233 and €‎/S 1.084
• Yields on 2- and 10-year Treasuries rose to 4.06% and 3.56%, respectively

Commodities mixed; gold and oil stronger

• Crude oil prices were 0.7% higher at midday to $73.3 per barrel
• Gold was up 1.1% at $1,975
• Grain and oilseed markets were mostly higher – China continues to buy US corn almost every day
• Soybeans and soymeal were the leaders today, as traders again focus on tightening supplies amid declining production estimates out of Argentina

Taiwanese leaders visits the US

• Taiwan remains a potential flashpoint in US-China relations as China’s Xi Jinping wants “reunite” Taiwan with the Mainland
• Taiwan’s President Tsai Ing-wen is expected to make stops in New York and in California this week and is expected to meet with US leaders, angering Chinese officials
• Simultaneously, the former leader of Taiwan – sympathetic to Mainland China – started a 12-day trip to the mainland yesterday, appealing to that growing sector of Taiwan’s population who simply want peace

Analysis by Arlan Suderman, Chief Commodities Economist.

Read more of Arlan’s thoughts at StoneX Market Intelligence at https://my.stonex.com/