Weekly Market Update
“We’re not even thinking about thinking about raising rates.”
~ Federal Reserve Chairman Jerome Powell, June 10, 2020
Oh, how times have changed, as investors entered the week bracing for Wednesday’s release of the minutes from the Federal Reserve’s meeting in March and market expectations have since surged to eight or more Fed interest rate hikes this year alone. This is a feat that has not occurred since 2005. As a result, despite the S&P 500 bouncing more than 10% from its March lows, stock and bond market volatility has remained elevated, and this week was particularly choppy as a steady flow of Fedspeak whipsawed markets. Ultimately, the minutes came in largely as expected with the Fed indicating a high likelihood for a half percentage point interest rate hike in May coupled with intentions to begin reducing the Fed’s massive $9T portfolio of U.S. Treasuries and mortgage-backed securities. Investors largely took these hawkish minutes in stride, but this was after multiple Fed members, most notably Fed Governor Lael Brainard, made public statements to front run Wednesday’s release and caused the first half of the week to be particularly volatile as investors quickly recalibrated expectations. As a result, interest rates continue to march higher with the yield on the 10-year US Treasury eclipsing 2.6%, while the average 30-year mortgage broke 5% for the first time since 2011, save for two days in 2018 (per Mortgage News Daily).
Expectations around monetary policy are now about as hawkish as possible with the market pricing in an almost 80% chance of a fifty basis points (0.50%) hike in May, 60% odds of another fifty bps in June, and over 90% likelihood for at least 8 twenty-five basis point hikes in 2022 (per CME FedWatch). Therefore, beyond a big surprise from next week’s consumer price index (CPI) for March, there is likely very little between now and the May 3-4 Federal Reserve meeting that can meaningfully change expectations. Next week the first quarter earnings season for the S&P 500 unofficially kicks off with the banks (JPMorgan, Citibank, etc.) and while over 55% of analyst ratings on S&P 500 stocks are now buys, the most since at least 2010 (per FactSet), we expect investors to continue to digest this week’s implications for the May policy announcements.
Manure Mania
On a hopefully lighter and certainly less esoteric note, we wanted to highlight a rather unusual consequence of the world’s supply chain issues. Fertilizer prices had already been surging before Russia’s invasion of Ukraine, but with Russia and its ally Belarus accounting for more than 40% of global potash exports, one of three critical nutrients used in agriculture, a severe shortage has worsened, and commercial fertilizer prices have skyrocketed (i.e., nitrogen fertilizer prices are up four-fold since 2020 per CRU Group). As a result, manure, a “commodity” livestock and dairy farmers have sometimes had to pay for removal, is emerging as a popular fertilizer alternative for grain growers. Demand has become so strong that prices for quality manure in Nebraska have reached $11 to $14 per ton, up from a typical price of $5 to $8 per ton (per Reuters). Perhaps oil isn’t the only liquid gold.
Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder
