Speakers at the Water Street Solutions Edge Conference in Tucson, Ariz., say they expect inflation to return in 2024. Not only will it have an impact on the interest rate environment, but it could bring the fund or speculative community back in to buy commodities, which would be positive for the grain markets.
Inflation cooled in 2023 following a series of interest rate hikes by the Fed. However, Arlan Suderman, chief commodities economist for StoneX, says there are already economic signs inflation could rear its ugly head in 2024.
“With interest rates coming down, we’ve seen a resurgence in interest in buying houses once again at lower mortgage rates,” he says. “Those are two sticky areas of inflation that can bring it back.”
Despite the markets pricing in lower interest rates this year, he doesn’t expect the Fed will cut rates, at least in early 2024.
“I believe that means higher for longer from the Federal Reserve, but the Federal Reserve will start to lose its influence on interest rates this year, particularly the longer end of the yield curve, as we see what’s projected to be a 23% increase in debt certificates offered onto the Treasury market because of government spending,” Suderman says.
That means the Fed most likely won’t be able to use interest rate hikes to curb inflation. That could cause the funds to buy commodities as a hedge against inflation, after being in a deflation mode for the last 21 months and short in many markets such as corn and wheat.
Darren Frye, CEO, Water Street Solutions, says: “The Fed has a tendency once they come out of something they go the other way. I think we could have a catalyst to get them flat and then we’d see if there’s something optimistic enough to get them long. But we might find out we have another surge in inflation and that would be bullish to commodities if that happened.”
Suderman adds that could support grain prices. “That doesn’t necessarily mean we get a big rally in prices, bit it does make it easier for the market to respond to any type of a friendly story that comes along,” he explains.
This environment might also pressure the U.S. dollar index, which is friendly for ag exports and prices.
