August 22 - Stocks are mixed, while commodity prices face headwinds at midday. Wall Street traders are again shifting their focus to Friday's anticipated address of Federal Reserve Chair Jerome Powell to the Fed's Jackson Hole, Wyoming symposium, with Treasury yields rising ahead of it anticipating that rates will remain "higher for longer." That in turn pushed the dollar to fresh 10-week highs this morning. The VIX is trading near 17 as we approach midday, so nerves remain relatively calm on Wall Street. The dollar index is trading near 103.6, which is just below its session high above 103.7. Yields on 10-year Treasuries are trading near 4.33%, after hitting a high just below 4.37% earlier in the session, while yields on 2-year Treasuries are trading near 5.02%, which represents fresh six-week highs. Crude oil prices are mixed to weaker on the stronger dollar and on China demand concerns, whereas the grain and oilseed sector is broadly lower as well, led by sharp losses in soybean prices. The strong dollar was a factor in today's weakness, creating broad-based weakness for the commodity sector, but the Midwest crop tour has also failed to provide notable fodder for the bulls to this point yet - at least not enough to counter the above headwinds.
USDA reported modest declines in U.S. corn and soybean crop ratings over the past week. It's normal for crop condition ratings to trend weaker at this time of year, but this week's declines were slightly larger than normal, which suggests a bushel decline in corn yield and a tenth of a bushel of soybean yield loss. The graphic below shows the week to week changes in my seasonally adjusted yield models as impacted by these changing crop condition scores. These do not represent our official StoneX yield estimates. Those come from our monthly customers surveys. However, they illustrate how changing climatic factors through the growing season impact yield expectations.
The crop ratings that go into these yield models reflect a subjective beauty contest for the crops - how good do they "look" to the observer. That changes once harvest begins, with crop ratings evolving into more of a reflection of whether local reported yields are coming in higher or lower than farmers in that region expected. The people who fill out the weekly surveys are human, and they tend to be influenced by the early harvest reports that they hear. Some years crop ratings correlate well with yields, and some years they do not. The difference is usually tied to weather in June when the maximum ear size is being determined in corn, and in years when August is either notably cooler or warmer than normal. This year saw significant stress in June, but it has seen a split in August, with the first half of the month being unseasonably cool and the last half unseasonably warm. That doesn't mean that the models are wrong this year, but it does reduce my confidence in them. Day #1 of the Midwest crop tour fit the models pretty well, but today and tomorrow's comments from the field will give me a better idea of how well my models reflect this year's yield potential. My bias is that the national yields will come in a bit below my models, but I currently see no reason to believe that they are low enough to dramatically change the longer-term outlook.
Existing home sales fell 2.2% to an annualized rate of 4.07 million units in July, down from 4.16 million in June and below analyst expectations of 4.15 million. Yet, prices pushed higher, suggesting that the longstanding shortage of houses on the market continues. Few people owning existing houses are interested in selling when nearly 4 in 5 of those houses have a mortgage with an interest rate of less than 4%, with many of them less than 3%. New home construction is hampered by labor shortages, leaving new buyers forced to bid up prices to get housing. The median existing home sales price was up 1.9% year-on-year to $406,700. The inventory of existing homes rose 3.7% in July to 1.11 million, which is equivalent to just a 3.3-month supply. Other data released today revealed that the Richmond Fed manufacturing index improved modestly to -7 from -9 the previous month. That says that the sector in the Richmond Fed district continues to contract, but at a slower pace. The survey revealed that both shipments and new orders increased in August, while the employment index slipped into contraction. However, the survey also revealed that firms are growing a bit more optimistic about local business conditions, raising hopes that we'll see better numbers down the road.
