Uncertainty may not be good for most financial markets in 2019. But the fog on Wall Street is keeping interest rates low at a time when many farmers are borrowing more.
The Federal Reserve so far has resisted White House calls for lower interest rates. Changes in Fed policy normally come only once a quarter when economic projections are issued. The next time that happens is at the two-day meeting concluding June 19. But barring some extreme events, the market’s betting the first interest rate cut won’t come until September at the earliest.
The Fed’s last update remained neutral on the topic, citing uncertainty from the impact of tariffs to global events like Brexit, which is next due for a decision in June from the British Parliament. Unemployment and inflation – the dual focus of the Fed – are both low, providing no immediate motivation for a shift. Corporate earnings remain good, despite much uncertainty over how recently rumblings in the trade war between the U.S. and China will impact profitability, especially in the technology and retail sectors.
Wall Street’s main yardstick remains the stock market, which was unable to follow through on records on some indexes earlier this month. The S&P 500 Index retreated below its 50-day moving average in part because fundamentals didn’t support more. Current valuations suggested the index topped out close to its forecast high for the year. That doesn’t mean a collapse is imminent. But a pullback wouldn’t be unwarranted either.
When the trade tension kicked up following the latest round of talks, some bears again pointed to the yield curve on Treasury securities for evidence. The curve shows interest rates from short- to long term. An inverted curve, with short-term rates higher than long-term rates, preceded every recession since 1955, though it’s also occurred without producing one too.
Indeed, there’s a pretty logical explanation for a flat yield curve right now. Short-term rates are set by the Fed in its target for Federal Funds – and those aren’t going anywhere until at least the next Fed meeting. Yields on the rest of the curve by contrast are set by the market, In times of uncertainty, investors often buy 10-Year Notes for safety. Buying these pushes up their price, and that lowers their interest rates, which move in the opposite direction of prices. That caused 10-year yields to briefly fall back below short-term rates last week.
Interest rates also impact the value of the dollar, another key concern for commodity-sensitive businesses like farming. The dollar appears a little overvalued by its fundamentals, which include factors like money supply, interest rates and economic growth in the U.S. and around the world. The dollar index is trading back near two-year highs, closing in on its projected high around 98.21. Lower rates would add more pressure to weaken the greenback -- when all things are equal, a country’s currency tends to follow its interest rates because investors chasing higher returns will buy the currency.
All things in the world aren’t equal, and the dollar is the best of a weak bunch. That includes the Chinese yuan, which has weakened back towards 7 to 1 to the dollar as the Chinese government pumps money into its economy to ward off the effects of U.S. tariffs.
If the Fed as expected does nothing in June, the next inflection point for financial markets could come later that month at the G-20 Summit. President Trump and President Xi of China are expected to meet on the sidelines of the gathering, perhaps reigniting more negotiations – or ending them altogether.
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.
For more corn, wheat and soy news, commodity marketing recommendations and daily commodity charts, subscribe to Farm Futures' free e-newsletter, Farm Futures Daily, and keep up during the day with Farm Futures on Twitter.