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Financial Outlook - Wall Street changes as fast as the weather

Rising interest rates and churning stock markets increase the anguish.

If you don’t like the news flow from Wall Street right now, just remember it’s like the weather. All you have to do is wait 15 minutes for conditions to change. This doesn’t make life any easier, whether you have skin in the stock market or are worrying about rising interest rates. Don’t worry. You’re not alone.

Trading in the wake of the latest meeting at the Federal Reserve was a case in point. This was one of the central bank’s mid-quarter meetings that usually don’t produce any changes in interest rates. But the statement on monetary policy released May 2 initially buoyed the stock market. Despite sluggish grow in the first quarter of 2018, likely hampered by weather, the Fed ratcheted up its language on inflation, noting it had moved closer to the group’s 2% long-term target. For investors, that means things are getting back to normal.

But storm clouds moved back in quickly, reversing gains. Worries about the trade dispute between China and the U.S. moved back into the headlines ahead of a brief negotiating session between the two countries that broke up Friday overnight as expected with no resolution.

Trade is just one of the currents swirling through these markets, including agriculture. All signs point to at least a feel-good meeting between President Trump and the North Korean leader he recently called “little rocket man.” Any hiccup there could be bearish, with another international flash point happening soon over the Iran nuclear deal. Likely U.S. withdrawal is rattling energy markets, which in turn is promoting interest in commodities in general.

Stocks, meanwhile, won’t take much pushing to trigger more selling. The S&P 500 index broke through its 200-day moving average, a key long-term metric watched by investors, during the first and second wave of tariffs exchanged between the U.S. and China. It traded below the average Thursday and tested it Friday. For those who remember the adage “sell in May and go away,” such actions can be troublesome.

And yet … Corporate earnings remain strong, supercharged by tax cuts that created a quantum leap in profits, one of the key metrics in stock valuations. As a result, while stocks are trading at below average levels right now, this year’s lows have met downside objectives for the first half of the year, which are around 2560 on the S&P. The projected annual low is down to 2428, so there’s still risk. But the market hasn’t come close to the potential high for the year thanks to those strong earnings.

As for interest rates, moves continue to be at a quarter of a point at a time. Eventually that could be like a frog slowly heating to a boil, and it’s adding incremental expenses for growers. The Fed has raised its base rate six times in around 2 ½ years, taking the so-called “prime” rate to 4.75%. Betting on Federal Funds futures edged closer to backing two more rate hikes this year, though probabilities of three are still around 37%.

The market’s other worry is the 10-year Treasury note, the fall-back “safe” return used in valuation models of everything from farm land to Facebook stock. Yields pulled back from a brief move above 3%, and the Fed’s next short-term move will flatten the yield curve even more. There’s still a 1 ¼-point spread, but a flat rate is fairly good at predicting recessions.

Higher rates pose another risk for farmers, strengthening the dollar. The greenback traded to a new high for the year this week, a move that tends to dampen commodity prices. Still, the dollar appears only slightly overvalued, with trade and budget deficits offsetting stronger growth. Currencies, like other markets, are trying to live with uncertainty, one reason why the volatility index in wheat is trading twice as high as stocks.

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.

TAGS: Outlook
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