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Moderating Rate Hikes Silver Lining of Bank Failures?

Calm is restored on Wall Street for now, as worries about bank failure contagion ease. Banks failures brought a silver lining: diminished expectations for rate rises. However, consumer price inflation day is still a problem, just as the Fed’s freedom to raise rates might be limited. Volatility and bond yields moderated, but for how long?

Markets stabilize, uncertainty remains

  • The S&P 500 index traded up over 1%. Banks stocks were up on the day, but still down 12% year-to-date
  • The VIX, Wall Street’s fear index, fell back to 24, a heightened level still signaling uncertainty
  • Yields on 2- and 10-year Treasuries saw yields trading back up to 4.28% and 3.62%, respectively
  • The dollar index is trading near 103.8, off highs

Rate expectations moderate …

  • The Federal Reserve meets a week tomorrow, and markets expect little or no movement on official rates
  • Fed fund futures, a market indication of near-term rate expectations, places 22% odds of no rate hike, and 78% odds of just a 25-basis point rate hike in March
  • Another 25-basis point rate hike is expected in May, taking the benchmark short-term rate to a 5.0% peak
  • Rate cuts are now forecast in June, culminating with rates between 4.25% and 4.5% by the end of the year

… but inflation still a problem

  • Consumer price inflation data came in pretty much as expected this morning – but core inflation remains a significant problem, just as the Fed’s hands might be tied on rate rises
  • The consumer price index (CPI) rose 0.4% month-on-month in February, matching analyst expectations, down from 0.5% the previous month
  • Headline CPI rose 6.0% year-on-year in February, matching expectations, down from 6.4% the previous month
  • Core CPI, excluding more volatile food and energy prices, was up 5.5% year-on-year in February, matching analyst expectations, down from 5.6% the previous month.
  • Monthly data was more worrying. Core CPI rose 0.5% month-on-month, slightly higher than expected
  • Components like shelter and services are still seeing inflation, even as energy prices, used vehicles and medical care services saw month-on-month declines

Commodities face demand headwinds

  • Broader commodity markets continue to face headwinds from economic uncertainties on Wall Street that have many traders worried about longer-term demand prospects
  • Crude oil prices are 2% lower on lingering demand worries
  • Russia agreed to extend the grain initiative that allows exports from three approved Ukrainian ports, but only for another 60 days and not 120 days as was originally agreed
  • Corn and wheat traders will be following these developments closely given tight supply markets
  • Low prices for US corn and wheat look attractive, and its grain exports are benefiting – for example, the USDA today reported that exporters sold 24.1 million bushels of old-crop corn to China over the past 24 hours
  • Soybean charts on the other hand look top-heavy, with prices struggling amid significant fund ownership that now worries that a short Argentine crop may not increase demand for US soymeal amid a bumper Brazilian crop

Arlan Suderman, Chief Commodities Economist
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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