It didn’t take Wall Street long to make a new record on the first day of trading in November. The S&P 500 Index gapped to an all-time high on the opening bell after better than expected jobs data cemented optimism voiced by Federal Reserve Chairman Jerome Powell that the economy is in “a good place.”
The shift from doom and gloom to boom came quickly in a mercurial market. Concerns about slowing global growth and worries a long-term trade deal with China won’t get done were swept under the run by news that on the surface wasn’t all that positive. The number of jobs created in October fell and the unemployment rate ticked higher. But the unemployment rate of 3.6% remains historically very low and more jobs were created than the weaker number expected due to the impact of the General Motors strike and end to temporary Census jobs.
The glass-half-full attitude was also seen when the Fed released its latest statement on monetary policy Oct. 30, followed by Powell’s press conference. The central bank cut its base short-term interest rate by another quarter of 1%, taking its target range to 1.5% to 1.75%. But after reductions at three meetings in a row, officials signaled their policy is now on hold. Betting on Fed funds futures agrees.
Wall Street bulls hope the three cuts amount to a mid-course correction to keep the economy humming, which is what happened the last two times the central bank adopted a similar tactic in 1987 and 1998. Recessions finally came a couple years later but were triggered by external events – the oil price spike of the first Gulf War and the 9/11 terror attacks.
For farmers, continued investor optimism would be mostly positive. First and foremost, fewer routs in New York would ease spillover selling in Chicago, where stock index futures also trade. Risk aversion quickly spreads from one market to the next and also boosts demand for safe havens. The mattress of choice around the world remains the U.S. dollar, and a stronger greenback normally is bearish for commodities denominated in it.
The dollar weakened some in October but remains near its strongest level since May 2017. Currencies often follow interest rates; the Fed may be cutting but other central banks are moving into negative territory trying to keep their economies afloat, so U.S. rates are the best of a weak lot around the world.
The reduction in short-term rates also eased concerns about an “inverted” Treasury yield curve. Short-term interest rates were stronger than long-term rates before every recession since 1955, and the pattern was seen for much of the summer. But the trend is an imperfect forecasting tool: recessions sometimes take many months to develop. And while the curve is still fairly flat, yields on 10-year Notes ended October at 1.69%, while the 2-year security was at 1.52%. The good news for farmers is that both of those rates are low by historical comparison. The low Federal Funds rate eases the cost of financing crop inputs, while the cheap 10-year helps support farmland values.
To be sure, there are plenty of speed bumps, or at least question marks, ahead. The European Union agreed to delay Brexit again, this time until Jan. 31, allowing Britain to hold elections in December as Prime Minister Boris Johnson hopes a victory will allow him to push a deal through. Johnson leads in polls but lacks a majority, so there’s no guarantee the outcome will be anything except more muddling.
The China trade deal could also be a minefield. Ditto for Hong Kong, North Korea, Venezuela, Iran – the list is a long one. But stock prices don’t appear too overvalued based on the data, including one fundamental that matters. U.S. companies are loaded with debt, but are also making money, and expect that to continue in 2020. For them, the glass is already full.
Senior Editor Bryce Knorr joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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