Morning Brief – Cheese

Cheese

Before I get to the astronomical rally in cheese futures that I know you have been eagerly awaiting, let’s take a look at what the Federal Reserve said last night in one of its most defining monetary policy meetings in a decade. As we discussed recently, the market knows that global central banks need to end crisis-era monetary policy. Those same central banks therefore face the challenge of how to begin that process without spooking the market by admitting that the helping hand that has preserved monetary and financial stability since the pandemic broke out needs to be taken away. The Fed’s decision showed last night that the easiest way to do this was to stick to its story that the hand doesn’t need to be retracted and therefore the not-so-invisible hand of the Reserve will continue to guide markets with ample liquidity, negative real rates of interest and ample asset purchases. Just as predicted, the Dollar has sold off and, for now, markets look ahead to the June policy meeting for the real discussions to begin.

The take away memo of last night’s dovish Federal Reserve meeting was that the central bank is “still not thinking about tapering” monetary support. To put that in context, that’s a little bit like a driver of a vehicle heading towards a cliff-edge and claiming they’re still not thinking about breaking. Treasury yields immediately fell to 1.61% on a generic ten-year note given the expectation that the Fed will continue to kick the can down the road and provide for ultra-accommodative policy further into the future than expected. The Dollar followed yields lower, breaking through 1.21 versus the Euro for the first time since February. During the pandemic, the Federal Reserve’s balance sheet has almost doubled from approximately 4, to just shy of 8 trillion Dollars.

The accumulation of assets on the Fed’s balance sheet alongside record low interest rates has provided the loosest monetary conditions in the United States ever. At 8 trillion Dollars, the Fed’s accumulation of assets represents a value of more than one third of US GDP. To think that the QE programmes that have allowed the balance sheet to swell to these levels have been necessitated to fill holes in private demand within once healthy markets shows the hurdle that the US economy and Fed will have to surmount to reach monetary, economic and financial normality. The longer the programme goes on and the longer the Fed staves off the market, the harder this correction and taper tantrum could be. USD has weakened for now therefore, however, as even lower yields and ever loose monetary conditions continue in a high growth environment, the potential spill over into inflation will create immense tail risks to the Dollar.

Surely this can’t be Gouda for the US economy in the long run… and that reminds me… cheese futures..! Did you know that the Chicago Mercantile exchange added blocks of cheese to its range of traded futures contracts last year? Designed, as is any futures contract, to allow buyers and sellers to hedge their exposure to assets in a secured yet open market environment, the cheese futures are traded in blocks of 20,000 lbs (9 tonnes). Cheese futures trading activity has soared since the beginning of the year with open interest in the asset jumping fivefold since the start of the year. The start of the American grilling season (apparently that’s a thing) alongside the recovery in US restaurant sales as the economy opens have accompanied a rising price per pound of the commodity. If you’re thinking of speculating on the commodity, mind out for the nature of futures markets as some are deliverable upon expiry.. eDAM that’s a lot of cheese!

Discussion and Analysis by Charles Porter

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