Commodity Insight: Facing a Fed-induced recession

There were two big events the stock and commodity markets faced this week, as well some breaking news that was positive for U.S. grain producers.

As a result, this week was one for the record books by any measure. It was a volatile, wobbly week that was far more bearish than bullish for most all markets.

The first event, on Monday, the markets had to digest a monthly U.S. Department of Agriculture report for grains that would give the trade an early view of yields and production for corn, soybeans and wheat.

The data turned out to be wildly bullish for soybeans with yields lower than expected and fewer planted acres than expected.

The report sent soybean prices higher by 75 cents a bushel, a huge rally. The corn data also showed lower yields and lower acres, as well, and the market rallied 15 cents a bushel.

The report highlighted the fact that carryover stocks of corn and soybeans are extremely tight. Thus, there is no room for either crop to grow tighter without a serious rationing rally.

The second event, on Tuesday, was the release of a monthly CPI report that measures inflation. Simply put, the inflation was 8.3% on a year-over-year basis with most economists expecting a decline.

The report showed food prices are still going through the roof. Food costs spiked 11.4% over the past year for the largest annual increase since May 1979, according to the Bureau of Labor Statistics.

Going into the CPI report, hopes were high the Fed would not lift interest rates dramatically if the inflation data was moderate. But the report showed inflation running hot, making it a given the Fed will possibly hike rates by a jumbo — 1%? — amount on Sept. 21.

The stock market took one look at the inflation data and the Dow Jones fell nearly a whopping 1,300 points, the worst one-day decline since June 2020.

On the same day and following the lead of the Dow, there were sharp losses with grains, cattle, metals, bonds, the crypto markets and the major commodity indexes.

It was a bearish day and due to the fact that inflation is stubborn and the Fed may not only lift rates sharply, but keep them elevated for a longer period of time.

From CNBC News: “Inflation isn’t just about fuel costs anymore, as price increases broaden across the economy.”

The article states: “For the better part of a year, the inflation narrative among many economists and policymakers was that it was essentially a food and fuel problem. Once supply chains eased and gas prices abated, the thinking went, that would help lower food costs and in turn ease price pressures across the economy.

“August’s consumer price index numbers, however, tested that narrative severely, with broadening increases indicating now that inflation could be more persistent and entrenched than previously thought.”

And it was those fears that sent the Dow tumbling nearly 1,300 points on the day of the CPI report.

But good news for U.S. agriculture came late this week with harvest at hand. The Biden administration announced a tentative deal has been worked out with labor unions and railway owners to avert a nationwide rail strike. A lengthy strike would have been simply catastrophic for agriculture.

From northernagnet.com, with “Railroad Strike Averted After Tentative Deal Reached Between Railroads and Unions” as the headline: “President Joe Biden early Thursday announced overnight negotiations between major railroads and unions had reached a tentative agreement to avoid a nationwide rail strike that was set to occur Friday.

“The deal, if culminated, would bring a sigh of relief across the agricultural and biofuels supply chain. Agricultural groups this past week had increasingly called on Congress to prepare to step in to block a potential strike that would have gridlocked commodity supply chains at the beginning of harvest.”

For the week, averting a rail strike was the only positive news that surfaced. Moving forward, all markets, stocks, bonds, currencies and commodities now have to endure the potential for a jumbo hike in interest rates on Sept. 21 when the Fed meets.

For the past year, a host of markets have been rising due to shortages. But higher interest rates always spawn slower economic growth and a pronounced decline in demand.

Such a scenario is price negative, bearish to all markets, with the only exception being the U.S. dollar that heads north when rates head north.

Last week, the dollar posted a new 20-year high and ended this week a bit easier. However, if the Fed shocks the marketplace with a jumbo rate hike, it seems logical to assume the greenback will move higher yet.

All in all, there is nothing bullish about higher rates. Consequently, the United States may soon face a Fed-induced recession.