Beans in the teens? How about the 20’s?
January 31, 2022
–March’22 soybeans print 1489 this morning, which is a new high for that contract. I believe the all-time high for a front contract was 1758 in 2012. While it’s probably the case that inflation prints will start coming down later in the year, the absolute price for food will likely still be going up. Prices of fertilizer and other inputs have been soaring. The price of DEF, diesel exhaust fluid, a product that diesel users need to meet EPA standards, was up 160% last year. Eventually base effects will bring down inflation numbers, but the cost of living will likely dominate news headlines, making it tougher for the Fed to raise rates quickly.
–Flattening along the back end of the curve continued Friday with all euro$ one-year calendars from EDZ22/EDZ23 back making new lows (Z2/Z3 settle 49.5, down 4.0, while Z3/Z4 is just 3.5, down 1.5). Some calendars in blues have again inverted. For example EDH25/EDM25 three-month spread settled -0.5. Bostic helpfully said in an interview with the FT that a 50 bp hike could come in March. I did not read the interview, so I am sure I am missing some nuance, but it doesn’t really matter. The hint of 50 in a market already beginning to price that way is negative for the curve, which in turn sends the signal that the economy will be slowing. The three years of euro$ contracts from EDH’24 to EDZ’26 are within a six bp difference of 9803 to 9797, right around 2%. These contracts are NOT forecasting an inflationary spiral ahead. I personally think all back rates should be much higher, but a Fed who now has found the old Bundesbank religion is clearly able to inflict damage on an asset-price dependent economy.
–That’s where the Fed stands: at the intersection of higher cost-of-living expenses, spurred in part by energy policies and the gushing fiscal and monetary response to covid, and an economy now accustomed to high and increasing prices of financial assets. They might successfully squelch the latter without doing much to alleviate the former.
