“Should I stay or should I go?” – The Clash, 1981
Now that the smoke has cleared (literally) on the East Coast, the debate on whether the Federal Reserve will “stay” (pause and hold the current Fed Funds rate at 5% to 5.25%) or “go” (hike by 25 bps) on June 14th has heated up.
The rate move is hard to predict, however, one could argue that it no longer matters as markets continue to digest / discount the shape of a recovery, which could ultimately be a “Stagflation No Landing” situation, at least during 2023.
Equity market performance, a key discounting mechanism, is positive. What is interesting is that the S&P 500 on an equal-weighted basis (that adjusts for heavy technology stock influence) has turned positive, and is up 2.4%. This suggests that market breadth is improving.
One interesting note from last week in the food and agriculture space is that AeroFarms, a Newark, NJ-based indoor farming company, has filed for bankruptcy protection. We love the taste of AF’s arugula and micro-greens, however the company’s profit model has been challenging from the start due to high costs and competition.
S&P 500 Performance in 2023
S&P 500 Standard (White) vs. Equal Weighted Index (Blue)
Source: S&P Global
The Watch List (What We Are Monitoring)
- Fed Rate Decision
- Will the Fed hike 25bps or pause at this week’s FOMC meeting? And importantly, what will be their forward guidance?
- P&C Insurers Pulling Back Due to Losses
- Insurers are pulling back on homeowners’ policies in vulnerable areas nationally out of fear of floods, storms and fires made worse by climate change and soaring costs of rebuilding. Allstate and State Farm recently announced they would stop offering new home-insurance policies in California, saying it has become too expensive to insure new.
- China Tensions
- We are bracing for increased trade restrictions with China by the Biden Administration. China has reportedly imported record amounts of soybeans from Brazil rather than the US thus far in 2023. Partially offsetting this, USDA has reported a double-digit amount of soybean flash sale to Spain over the past month.
- Eurozone Recession
- Germany’s economy is wobbling and appears to be in recession as inflation has hurt consumption, following the lagged negative impact of the Black Seas conflict. Key question = what country is next?
Numbers of Interest
+1.5% Forecast of U.S. GDP growth for 2023 based on the most recent Business Round Table Survey.
-22.6% Average weekly changes in wages in San Francisco County, CA in 2022 (due to largely to tech layoffs and relocations), vs. -2.3% for the US overall. California leads the USA in having the higher unemployment rate of 4.5% (as of April 2023) vs. national rate of 3.7%
+20% Potential increase in capital requirements for large U.S. banks stemming from new regulation post the SVB, First Republic, and Signature failures.
+23% A construction boom is underway fueling the sales of excavators, which grew by 23% during 2023 despite rising interest rates and recession fears. (Source: WSJ and Off-Highway Research).
$9.5 billion Revenue from Amazon’s advertising business in 1Q 2023, which was up 21% year/year.
-7.5% Represents the drop in exports from China during the month of May, following a 8.5% rise in April (partly reflecting a difficult comparison with the year ago period.)
Kenneth Scott Zuckerberg is Lead Industry Analyst, Farm Supply & Biofuels, CoBank.
