Canada Markets

I would like to begin by making it clear that this is in no way a political statement, but rather an attempt to try to consider what impact policy actions taken by the new United States administration may have on interest rate and commodity markets.

Interest rates had been increasing steadily since the U.S. Federal Reserve embarked on its current rate-cutting cycle in September. Since then, it has cut the Fed Funds target rate by a full percent. In the meantime, the rate on the U.S. 10-year note jumped from 3.64% at the time to 4.80% on Jan. 13. Great-than-expected inflation reports out Feb. 12-13 made it look like the pullback in rates in the meantime was coming to an end with the U.S. 10-year note jumping back up to 4.64% from a low of 4.40%.

Then a strange thing happened: Treasury prices turned and jumped higher against expectations. The most likely explanation -- developments on the labor front as the Department of Government Efficiency (DOGE) announced multiple terminations across a variety of Federal agencies. The result was the reaction low of 4.40% being tested again with it looking likely to fail as this is being prepared.

The idea of a cut to government waste and spending came as no surprise to the market but the speed, method and scope of job cuts at the federal government level did. With 3.006 million federal employees as of February 2025 (according to the Federal Reserve Economic Data (FRED) from the Federal Reserve Bank of St. Louis), the total number of job losses from the one change in policy could provide an unexpected shock to the labor market. Especially considering DOGE is constantly trying to find new and creative ways to terminate employees.

Not only does that cause potential ripple effects through the economy as fired workers may not be able to support businesses the way they had, but the impact on government contract holders has added to anxiety. With DOGE expecting to review and likely cancel a significant number of contracts, the impact on the labor force and the economy is becoming an increasingly stressful unknown.

With unforeseen weakness in the labor market being the one thing that the Federal Reserve has clearly stated would inspire further rate cuts, the market appears to be pricing in the likelihood. President Donald Trump demanded "interest rates drop immediately," and through the speed of the cuts under DOGE, he may get the results he wanted without having to fight the Fed.

Not only would the Federal Reserve be more likely to lower the overnight target rate, but long-term interest rates would fall in response to a weak labor market given its deflationary impact on the economy. That is playing out already, with the bottom formations on treasury market charts looking more likely to hold all the time. As you can see on the accompanying chart, support at the January low held and now resistance is being tested. That corresponded to a U.S. 10-year note high of 4.80%, marking a top with a reaction low of 4.40% being tested currently.

The problem with this development is that if actual economic impact does not live up to the anxiety fueled fears and inflation does continue to accelerate as previously thought, it will largely go unchecked under a lower interest rate environment. The situation will have to be monitored closely for clues, and rest assured we will be watching.

Besides the fact everyone is affected by interest rate levels, either through the impact on expenses or income, why should we be concerned? Because of the influence the subject has on Commodity Index Trader (CIT) strategies.

As a group, they have been actively buying agricultural futures as a hedge against inflation since the August 2024 low. A basket of corn, Chicago and Kansas wheat, soybeans, soybean meal and soybean oil as well as feeder cattle, live cattle and lean hog futures demonstrate this very well. CITs went from a net long of 808,286 contracts (as of Aug. 12) in those markets to a recent high of 1,248,906 contracts (as of Feb. 18). The 440,620 additional net long purchases would have contributed to the rally seen throughout and a sudden shift in their outlook could present a serious risk.

If the efforts by DOGE and the speed of their implementation are enough of a shock to the economy to inspire disinflation and a recession -- or even just the likelihood of one -- long liquidation by CIT funds could be very problematic. In April 2022, they made the sudden shift to liquidate their long hedges against inflation, contributing to the sharp selloff seen in grain and oilseed markets at the time. They went from being net long 1,398,256 contracts March 28 (of the previous basket of ag commodities) when the Fed declared war on inflation to a net long of only 866,114 contracts on the May 22, 2023, low. It is too early to push the panic button yet, but weakness from Feb. 20 through to the time of writing (Feb. 24) in the grain and oilseed markets certainly does look like some liquidation is taking place. We will know more with the Commitments of Traders update on Feb. 28.

In the meantime, it will be important to monitor reports of economic health and inflation indications. The Fed's preferred indicator, the PCE (personal consumption expenditure) index is set to be released Feb. 28 with added importance.

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I welcome feedback or any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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