Suderman says: Fed Governor Powell spooks markets with rate hike fears

Testimony by Federal Reserve Chair Jerome Powell spooked financial markets, with stocks and bonds lower and the dollar higher, after he drove interest rate expectations higher for longer, with futures expectations now peaking at 5.75% to 6.00%, and staying high into next year

Powell argues Fed faces more inflation challenges

• Powell indicated that it may be necessary to ratchet the pace and scale of rate hikes as economic data came in stronger than expected since the latest meeting of the Federal Open Meeting Committee
• The Fed is prepared to increase the pace of rate hikes "if the totality of the data were to indicate that faster tightening is warranted”
• Policymakers will watch Friday's jobs report, and updated inflation data ahead of that next Fed meeting
• Fed fund futures are pricing in a 25- to 50-basis point rate hike at the next meeting. The Fed's next policy meeting is scheduled for March 21-22

Markets spooked by rate hike fears

• Broad stock market indices fell 1.5%. Yet Wall Street’s panic indicator, the VIX index, was unchanged at 19
• Yields on 12-year and 10-year Treasuries traded up to 4.96% and 3.95%, respectively, close to psychologically important 5% and 4% levels
• This move in bonds puts the inverse spread above 100 basis points, reflecting the market's expectations for recession
• The dollar index rallied sharply this morning to trade above 105.5, 3.5% higher than January lows

Commodities weaker on recession fears

• The broader commodity sector came under pressure on recession fears and a stronger dollar
• Crude oil prices fell over 3%, failing to successfully hold a move above the 100-day moving average
• Grain and oilseed traders are focused on the USDA's monthly WASDE crop report tomorrow, which could reinforce the message that Argentinian corn and soybean production are weaker on bad weather
• Grain and oilseed markets were mixed to lower

China rebounds? Ukraine grain exports continue?

• After disappointing news, there are encouraging signs that China’s economy will see a healthy rebound this year, with a notable increase in stocking up with raw commodities for goods production. This will boost commodity demand across the board
• On the other hand, Chinese exports contracted for the fifth month in a row in February, with shipments in the first two months of this year down 6.8% from the previous year, not good news for China’s export-dependent economy
• Online negotiations are underway with Russia to extend the Ukraine grain export initiative. The current agreement is good through March 18, with traders still expecting another 120-day extension

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com