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Calm is restored on Wall Street for now, as worries about bank failure contagion ease. Banks failures brought a silver lining: diminished expectations for rate rises. However, consumer price inflation day is still a problem, just as the Fed’s freedom to raise rates might be limited. Volatility and bond yields moderated, but for how long?

Markets stabilize, uncertainty remains

• The S&P 500 index traded up over 1%. Banks stocks were up on the day, but still down 12% year-to-date
• The VIX, Wall Street’s fear index, fell back to 24, a heightened level still signaling uncertainty
• Yields on 2- and 10-year Treasuries saw yields trading back up to 4.28% and 3.62%, respectively
• The dollar index is trading near 103.8, off highs

Rate expectations moderate …

• The Federal Reserve meets a week tomorrow, and markets expect little or no movement on official rates
• Fed fund futures, a market indication of near-term rate expectations, places 22% odds of no rate hike, and 78% odds of just a 25-basis point rate hike in March
• Another 25-basis point rate hike is expected in May, taking the benchmark short-term rate to a 5.0% peak
• Rate cuts are now forecast in June, culminating with rates between 4.25% and 4.5% by the end of the year

… but inflation still a problem

• Consumer price inflation data came in pretty much as expected this morning – but core inflation remains a significant problem, just as the Fed’s hands might be tied on rate rises
• The consumer price index (CPI) rose 0.4% month-on-month in February, matching analyst expectations, down from 0.5% the previous month
• Headline CPI rose 6.0% year-on-year in February, matching expectations, down from 6.4% the previous month
• Core CPI, excluding more volatile food and energy prices, was up 5.5% year-on-year in February, matching analyst expectations, down from 5.6% the previous month.
• Monthly data was more worrying. Core CPI rose 0.5% month-on-month, slightly higher than expected
• Components like shelter and services are still seeing inflation, even as energy prices, used vehicles and medical care services saw month-on-month declines

Commodities face demand headwinds

• Broader commodity markets continue to face headwinds from economic uncertainties on Wall Street that have many traders worried about longer-term demand prospects
• Crude oil prices are 2% lower on lingering demand worries
• Russia agreed to extend the grain initiative that allows exports from three approved Ukrainian ports, but only for another 60 days and not 120 days as was originally agreed
• Corn and wheat traders will be following these developments closely given tight supply markets
• Low prices for US corn and wheat look attractive, and its grain exports are benefiting – for example, the USDA today reported that exporters sold 24.1 million bushels of old-crop corn to China over the past 24 hours
• Soybean charts on the other hand look top-heavy, with prices struggling amid significant fund ownership that now worries that a short Argentine crop may not increase demand for US soymeal amid a bumper Brazilian crop

Arlan Suderman, Chief Commodities Economist

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