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CME’s chief economist discusses the current economic environment at TCF meeting

Dr. Blu Putnam, chief economist and managing director of the CME Group, the world’s largest operator of futures and options exchanges, was the guest speaker at The Chicago Farmers’ March 9, 2020, meeting. He provided his perspectives on the “Current Economic Environment with Insights from the CME Market Sentiment Meter.”

The presentation opened with a discussion around the timing of when different markets reacted to the spread of the COVID-19 virus.  Dr. Putnam noted that oil markets were quick to react with price declines, since the virus was first discovered in China, because China is a huge importer of oil.  By contrast, downward pressure on U.S. and European equity indices were several weeks behind.  This appeared to reflect that global equities waited until the narrative changed from a China-only story to a global narrative with news about tracking the spread of the virus around the world.

The reaction of equities to policy responses also was intriguing.  Dr. Putnam noted that when the U.S. Federal Reserve (Fed) announced an emergency cut in rates on March 3, 2020, equities reacted with further declines.  While the Fed was acting in an accommodative manner, which under other circumstances might have been reflected in an equity rally, market participants chose to focus on the forward-guidance, namely that the Fed was extremely worried about how the economy would handle the spread of COVID-19.

Dr. Putnam shared some new research from CME Group on ways to quantitatively track changes in market sentiment.  In an example from the past year, Dr. Putnam shared that the Market Sentiment Meter showed that back in May 2019, equities were in a highly conflicted sentiment state.  At the time, market participants were weighing the pros and cons of the U.S. tariff tensions with China, with some market participants seeing optimism while others were very worried about a global slowdown in trade and growth.  By December 2019, equity markets had become comfortable that a reasonable resolution of the tariff tensions was at hand with a Phase One U.S.-China trade deal, and the sentiment risk distribution returned to a typical balanced-risk shape.

In closing, Dr. Putnam focused on agriculture and talked about how market sentiment had evolved during the planting season in 2019.  Early in the season, sentiment and risks seemed relatively balanced.  By May 2019, however, sentiment and risks had shifted into a much more anxious state, due to a cold spring and the considerable flooding that was delaying plantings.  Dr. Putnam noted that as of March 2020, the corn market had returned to an anxious sentiment state.  Corn market participants had a lot about which to be concerned with oil prices dropping and impacting ethanol, with the virus lockdowns closing restaurants and impacting beef (steak) sales, and with jobs being lost in many sectors of the economy shrinking incomes and demand.