The stock market was focused on what the Federal Reserve will do in the near future, while the war in Ukraine remains another concern. Fertilizer prices are skyrocketing because of the war, and farmers could decide to buy less because of the higher prices. Using less fertilizer will cause lower crop yields.
The war could be a triple threat to the commodities markets as higher costs, shortages, and geopolitical risks add to an already high inflation rate. Russia and Belarus combine to provide about 40 percent of the world’s potash exports. With sanctions against both countries, prices will continue to rise.
Even though Saskatchewan is the world’s largest producer of potash, prices are still rising. In early 2021, the price on the Vancouver market for potash was around $210 per metric ton. Today, potash is priced at $565. In addition to potash, Ukraine and Russia normally export 30 percent of the world wheat supply and 20 percent of the world corn supply.
Inflation and the Federal Reserve became the main focus last week when San Francisco Fed President Mary Daly and Fed Governor Lael Brainard emphatically stated the Fed’s commitment to fighting inflation through higher interest rates.
In addition to interest rates, the Fed will be aggressive in the drawdown of the assets they are holding on the balance sheet, starting in May. Many economists believe this will be a monthly roll-off of $80 to $100 billion. Roll-off is allowing maturing bonds to roll off the balance sheet without being reinvested. This process will shrink the money supply, which increases interest rates.
What really spooked the markets is that these aggressive statements were made by Brainard and Daly, who usually favor lower rates and less restrictive policies. Their comments prove how serious inflation has become and how serious the Federal Reserve is about taking action.
These comments sent the 10-year yield to a high for the year and stocks lower. The Dow Jones Industrial Average lost 0.28 percent, the S&P 500 lost 1.16 percent and the NASDAQ was lower by 3.86 percent.
The major market indexes are still down for the year. The DOW has lost 4.5 percent, the S&P 500 is down 5.8 percent, and the NASDAQ is lower by 12.4 percent year-to-date.
The yield on the 30-year bond rose by three bases points to 2.73 percent, the highest level since 2019. The 2-year advanced by five basis points to close at 2.52 percent, and the 10-year note closed at 2.71 percent. This is a tight yield curve, but no longer inverted as of the close on Friday.
Mortgage rates followed the bonds last week. The 30-yeard fixed-rate mortgage hit 5.02 percent on Tuesday, the highest rate since 2011, except for two days in 2018. One year ago, the 30-year mortgage was at 3.38 percent.
Even though mortgage rates are climbing, home prices continue to increase. On Tuesday, a report from CoreLogic showed that home prices in February were up another 20 percent from a year ago, making it the 12th consecutive month of annual home price increases.
As of Saturday, April 9, the conventional 30-year fixed mortgage stood at 5.23 percent, and the fixed 15-year mortgage was at 4.31 percent. According to Freddie Mac on Thursday, mortgage rates have risen 1.5 percentage points over the last three months, the fastest three-month rise in rates since May 1994.
Oil prices fell for the second consecutive week. The drop occurred when member nations of the International Energy Agency announced they are going to release 60 million barrels over the next six months. The U.S. announced they are releasing 180 million barrels.
Oil services company Baker Hughes shows that U.S. producers added 13 oil rigs last week, a third straight week of gains. The one concern is that the release of this emergency oil could limit the incentive for OPEC and U.S. oil shale producers to increase production.
At the end of the week, West Texas Intermediate (WTI) futures closed up $2.23 to $98.26. And Brent crude futures finished the week up $2.20 at $102.78 per barrel.