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

Contact: Arlan.Suderman@StoneX.com

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.