Perspective: Morning Commentary, 12/22/2015

Tuesday, December 22, 2015

December 22 – The Department of Commerce reports that third quarter GDP slipped to 2.0% in this morning’s final revision for the quarter, versus the previous estimate of 2.1%. The latest estimate of third quarter gross domestic product – the way we measure economic activity – matched Wall Street expectations, but was down from 3.9% growth in the second quarter and it reflected the slowest growth since early 2014. The lower number is largely due to a rising trade deficit due to a strong dollar and a smaller buildup in inventories. The slower inventory build reflects a lack of confidence in the economy by the business sector. Spending on new home construction was revised upward from 7.3% to 8.2% versus the previous estimate. We should see additional data on existing home sales released at 10 a.m. EST this morning.

The slowing U.S. economy is precisely why many analysts did not want the Federal Reserve to initiate lift-off with a rate hike last week, but it is also precisely one reason why the Fed felt compelled to do so. Zero interest rates are to be reserved for emergency conditions and 2.0% growth does not represent an emergency condition. The Fed didn’t want to do anything that would inhibit a recovery, but it also wanted to have the ability to lower rates once again if conditions warranted. Even so, there are those in economic circles arguing that we should have negative rates as they do in Europe. I believe the Fed should have raised rates in the first quarter, but having waited, had little choice but to proceed with lift-off at this later date.

There’s been little reaction to the GDP data in the broader markets thus far this morning. The numbers were largely known with few surprises. The trade is taking on an increasingly holiday mode this week, although it still has considerable economic data to digest yet this week. We’ll see a short trading day on Thursday, with the markets closed for Christmas on Friday.

Fundamentally, the grains must place their hopes on a weather story to free them from the bearish sentiment directed toward the broader commodity segment as the global economy continues to struggle. The most significant potential headline-grabbing story continues to be in South America, where the next six to eight weeks are critical for crop development. El Nino continues to favor southern Brazil and Argentina with yield-enhancing rains, while the northern half of Brazil’s crop belt faces deficits. Even so, the just-in-time rains have maintained yield potential thus far for all but the northern and eastern 20% of Brazil’s belt.

Widely-scattered showers were seen in mainly north-central and southeast Mato Grosso over the past 24 hours, along with central and northwestern Mato Grosso do Sul and far western Goias. Scattered showers are expected to linger in central and northwestern areas of Mato Grosso over the next two days, but otherwise focus primarily on wetter southern areas of Brazil. As such, roughly 20% of the belt is expected to remain under yield-reducing moisture stress, with trend to above-trend yields expected elsewhere. Some private forecasters are beginning to ratchet their Brazilian soybean production estimates back to the 96 to 100 million metric ton level. Longer-term, the outlook is a bit better for the region during the safrinha growing season.

Otherwise, the only other potential stories are in wheat, with possible weather problems in the Black Sea and in India. Both faced very dry weather for planting. The Black Sea saw widespread soaking rains to put the crop to rest for the winter in relatively good shape, although acreage deficits will need to be made up by lower-yielding spring crops, if the weather cooperates at that point, which is still in question. As for India, a modest acreage decline is anticipated and the weather remains in a dry pattern, although at least the region doesn’t have to contend with the harsh winters seen in the Black Sea region. Even so, we could see India turn into a net wheat importer in the year ahead if the current pattern holds into the spring.

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