With the US and Chinese trade positions hardening, market sentiment has swung into risk-off mode with oil sliding, equities weak and USTs bid. Moreover, this has further fuelled speculation that the next move at the Fed will be a cut, with the OIS market now pricing in close to four cuts by the end of 2020. While economic uncertainty is clearly on the rise there are nonetheless still signs of a build-up in price pressures, which could ultimately prevent the Fed from cutting rates should the US avoid a material slowdown in growth, or at least cause the market to price a less dovish outcome than today.

We have previously highlighted rising gasoline prices as evidence of this trend and can now add soaring corn prices. As the top-left chart shows, corn futures have jumped 24% since the May low as wet spring conditions have delayed planting (the USDA reports that only 58% of the corn crop has been planted versus 90% last year). This tallies with the message from leading indicators, which show that core inflation pressures should begin to rise again later this year (last chart). Should higher gasoline and corn prices feed through to higher headline inflation, the recent build up in dovish Fed positioning is at risk.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception