Indices bounce on Debt Talk Optimism

Optimism is growing that the White House will reach an agreement with the Republican House. Traders are also monitoring a plethora of Federal Reserve members speaking publicly this week, with one already going on record to suggest more rate hikes are possible. Fed fund futures currently predict an assumed pause in rate hikes going forward, with rate cuts starting in September, with up to three overall cuts in place by the end of the year. Manufacturing data for New York State provided a reminder that recession could be around the corner.

Atlanta Fed President hints at more rate hikes

Atlanta Federal Reserve President Raphael Bostic said more rate hikes are possible, stating that he doesn’t expect any rate cuts this year, as inflation is likely to be stickier than markets believe, and if anything, “we may have to go up.” While he admitted progress on inflation, he added that the appropriate current policy is to ‘wait and see how much the economy slows’ from the existing policy actions. Bostic’s bias going forward continues to be that rates may need to go a bit higher to do the job of getting inflation down to the 2% mandated level.

New York State survey hints at recession

• The Empire State manufacturing index for May came in at -31.8, compared to an expected -2, reflecting sharp contraction for the sector in the state of New York – notably compared to +10.8 last month. (A minus number reflects month-on-month contraction in the sector)
• New orders and shipments plunged this month, after a significant rise in April
• Delivery times shortened somewhat, and inventories also contracted
• Employment and hours worked slipped lower for the fourth consecutive month
• Capital spending plans are sluggish, reflecting pessimism about future conditions
• However, prices continued to rise at roughly the same rate as the previous month (not a good sign for the inflation outlook)

Indices and Regional Banks bounce back, Dollar flat

• At the time of writing, the broad S&P 500, NASDAQ and Russell 2000 indices were up by 0.3%, 0.7% and 1.4% -- and the KBW Regional Bank Index also rose 2.6%
• The VIX, Wall Street’s fear index, was unchanged at 17.2
• The dollar index was unchanged at 102.25, sticking above its long-term support level, with and Dollar/Sterling and Euro/Dollar up 0.7% and 0.3% respectively
• Yields on 2- and 10-year Treasuries rose modestly to 4.00% and 3.51%, respectively

Gold holds above 2K mark, Oil falls, Grains and Oilseed prices bounce

• Gold prices were unchanged at $2,022 per ounce
• Crude oil prices fell 1.8% to $71.3 per barrel
• Grain and oilseed prices were mostly higher, with wheat leading the way with more than 3% gains following a bullishly construed crop report from the US Department of Agriculture’s bullish crop report on Friday
• Wheat prices lead the way, with 4% gains in Chicago and gains of more than 3% in Kansas City and Minneapolis
• Soybean prices were also strong on good domestic crush demand following late-week reports that Rosario had cut its Argentine production estimate to 21.5 million metric tons, with some soymeal business rumored to be switching to US origin
• Corn prices came along for the ride, supported by strength in wheat and soybean prices, and added support coming from this morning's USDA export inspection numbers

US Department of Agriculture’s bullish crop reports

• USDA’s Friday crop report had plenty of positive surprises. News on wheat was bullish; bearish for corn and soybean
• It’s new-crop corn exports are 300 million bushels too high in my opinion, when you work it through the global balance sheet, largely due to an overly optimistic Chinese import target

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com