The Debt Ceiling, Grain Futures, and More Fed Talk

Top things to watch this week

The Economic Calendar:

MONDAY: James Bullard Speaks, Thomas Barkin Speaks, Mary Daly Speaks, 3-Month Bill Auction, 6-Month Bill Auction

TUESDAY: Lorrie Logan Speaks, PMI Composite Flash, New Home Sales, Richmond Fed Manufacturing Index, 2-Yr Note Auction, Money Supply

WEDNESDAY: MBA Mortgage Applications, State Street Investor Confidence Index, EIA Petroleum Status Report, Survey of Business Uncertainty, 4-Month Bill Auction, 2-Yr FRN Note Auction, 5-Yr Note Auction, FOMC Minutes

THURSDAY: GDP, Jobless Claims, Chicago Fed National Activity Index, Corporate Profits, Pending Home Sales Index, EIA Natural Gas Report, Susan Collins Speaks, Kansas City Fed Manufacturing Index, 4-Week Bill Auction, 8-Week Bill Auction, 7-Yr Note Auction, Fed Balance Sheet

FRIDAY: Durable Goods Orders, International Trade in Goods, Personal Income and Outlays, Retail Inventories, Wholesale Inventories, Consumer Sentiment, Baker Hughes Rig Count

Futures Expiration and Rolls This Week:

Monday, May 22nd is the last trading day for June (M) Crude Oil Futures

Key Events:

• Trader’s macro focus is on the resolution of debt ceiling negotiations. 
• Economic data to watch include the global PMIs and U.S. PCE inflation.
• Fed members are on the speech circuit (Bullard, Daly, Bostic, Barkin, Logan, Waller).
• U.K. inflation on Wednesday.
• FOMC meeting minutes on Wednesday. 
• Japan CPI on Friday.
• Earnings season draws to a close with reports from Nvidia, Analog Devices, and Costco.

Stock Index Futures

Stock indexes were strong for the week. The S&P 500 traded higher +1.7%, and the Nasdaq index was higher +3.5%.

Equities and yields are rebounding on gradually improving optimism on U.S. debt-limit negotiations.

Can higher interest rates halt the vibrant tech rally? Interest rates are rising again, and the tech sector is betting that the rate hiking cycle will soon be over.

The tech sector is susceptible to interest rates because it is capital-intensive. Tech companies need to borrow money to invest in research and development and acquire other companies. Higher interest rates make it more expensive for tech companies to do these things, which could slow their growth.

The global economy is growing, and people worldwide are using more technology. This is helping to offset the impact of higher interest rates on the tech sector. However, the tech sector also benefits from strong global demand for its products and services.

As a result, the tech sector is betting that the rate-hiking cycle will soon be over. If this happens, it could lead to a further rally in tech stocks.

A few key short-term levels for the S&P 500:

Upside: 4235,4260,4300
Downside: 4170,4145,4110,4085

Interest Rate Futures

U.S. Treasury futures prices tanked, and interest yields soared last week.

Even as Federal Reserve officials started questioning the pace of higher interest rates, James Bullard, the president, and CEO of the Federal Reserve Bank of St. Louis, said that higher interest rates are insurance against inflation and favored a rate hike in June.

Dallas Fed President Lorie Logan said that a pause in rate hikes is not in order as of right now, though that could change in the coming weeks depending on incoming data. She said, “After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress. The data in the coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.”

The chances of a Fed Funds (June 14) rate remaining on hold are still high at 82%, with a 17% chance of a 25 basis point hike. Traders have been removing and adjusting the possibility of future interest rate cuts in December 2023 to June 2024 meetings.

U.S. Treasury yields compared to the last week:

30-Year yield 3.93% VS. 3.79%
10-Year yield 3.67% VS. 3.47%
5-Year yield 3.73% VS. 3.45%
2-Year yield 4.27% VS. 3.99%
2-10 Yield spread -0,59% VS. -0.52

Source: TradingView

DEBT CEILING TAIL RISK HEDGES

Gold was seen as the “ultimate” debt ceiling risk hedge. This has proven to be the total opposite. We are well below the 50-day and at must-hold levels. A close slightly lower and the 100-day moving average come into play.

Another go-to for “tail risk” traders is deep OTM S&P 500 put hedges, which also are a losing position at this stage as stock indexes have been higher.

The debt limit deadline is quickly approaching. Many analysts say it could happen between June 1-9. As a result, we expect the market volatility to increase if no agreement is inked in the coming ten days.

CORN AND SOYBEAN FUTURES

The grain markets skidded on the news last week that the Ukraine Black Sea grain deal has been extended for two more months. That means there is potential for more supply on the market.

Last week, corn and soybean futures for July expiration traded -4.8% and -5.9%.
The recent U.S. dollar index futures strength, improving U.S. weather, and weak global demand have also cast a negative tone on global grain prices.
According to the most recent COT report, hedge funds are net “short” agriculture futures for the first time since August 2020.

Do we fade the recent move? We are coming into an excellent seasonal time for prices in corn futures starting this Monday. Corn prices tend to peak in early June and bottom in early October.

The weather will be a key factor in the agricultural markets in the early season emergence in the Midwest. The weather has been ideal for planting so far. Here are some additional details about the best weather conditions for corn emergence:

• Temperature: Corn seeds need a soil temperature of at least 50 degrees Fahrenheit to germinate. If the soil temperature is too low, the seeds will not germinate.
• Moisture: Corn seeds need about 1 inch of water per week to emerge and establish a sound root system. If the soil is too dry, the seeds cannot germinate or develop a good root system.
• Sunlight: Sunlight helps to warm the soil and dry out the surface, which can help to prevent diseases. Corn plants also need sunlight to photosynthesize and produce food.

Source: TradingView

Asset Class Performance Summary

This performance chart tracks the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.

Thought of the Week

How did we get into this high debt situation? There are many factors:

• War: The United States has been involved in several wars in recent decades, which have been very expensive. For example, the wars in Iraq and Afghanistan have cost trillions of dollars.
• Tax cuts: The federal government has enacted several tax cuts in recent years, which have reduced revenue. For example, the Tax Cuts and Jobs Act of 2017 is estimated to have cost the government $1.9 trillion over ten years.
• Increased spending: The federal government has increased spending on several programs in recent years, including Social Security, Medicare, and Medicaid. These programs are very popular, but they are also costly.
• The Great Recession: The Great Recession of 2008-2009 led to a significant decline in tax revenue and increased spending on unemployment benefits and other programs. This helped to drive up the national debt.

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