By: Arlan Suderman, Chief Commodities Economist
November 1 - Stocks turned lower this morning when a series of economic reports raised fears of a more aggressively hawkish Federal Reserve going forward. The response was modest, but noticeable on Wall Street. The VIX firmed back above 26, while the dollar firmed off early lows to trade near 111.6. Yields on 10-year Treasuries firmed to trade near 4.07%, up more than 15 basis points from the session low. Crude oil prices remain more than 2% higher on rumors that China may reopen in the first quarter of next year, while the grain and oilseed market traded mixed to higher, led by a stronger soybean market.
Today's JOLTS report revealed that there were 10.717 million posted job openings at the end of September, exceeding the average analyst estimate of 9.875 million by nearly one million. Furthermore, the August number was revised to 10.280 million postings, up from the 10.053 million originally reported. I've previously stated that the Federal Reserve cannot tame inflation without also taming wage inflation, and that it cannot do that when there are 2-1/2 jobs available for every person looking for a job. Today's numbers, combined with the other data out today, suggests that the Fed still has work to do, and that it is not likely to be pivoting policy anytime soon.
Construction spending rose 0.2% month-on-month in September, after falling 0.6% in August. Analysts had expected a 0.5% decline in September. Construction spending was up 10.9% year-on-year in September, while the August data was revised to 10.1% year-on-year, up from the 8.5% originally reported. The October purchasing managers index survey for manufacturing came in at 50.4, up from 49.9 previously and beating analyst expectations that it would remain that way. In other words, manufacturing saw slight growth in October. The ISM manufacturing index also came in at 50.2, down from 50.9 previously, but above analyst expectations of 50.0. It was the combination of all the above data that raised fears on Wall Street that the Fed will not be pivoting soon, leading to a decline in stock values and a modest increase in the VIX, reflecting slightly higher fear levels.
USDA released its first crop ratings for the 2023 winter wheat crop on Monday afternoon. The ratings translate into a condition index score of 281, as shown in the graphic below, which is the lowest in the 35+ year history of the crop ratings for this week of the year - and the lowest by quite some distance. The graphic below shows the condition index score for the crop over the past 35+ years during this week of the year, compared to final yields for those crop years. The correlation is quite low, which is why the market is not reacting. I would tend to agree. Yet, I post this to show you the significance of the drought in the central United States this year, which puts the crop at significant risk if the weather pattern fails to change. Fortunately, we are seeing signs that the pattern is changing near-term to provide rain to the southeastern half of the Plains hard red winter wheat belt, along with portions of the soft red winter wheat belt. As such, we should see these ratings rise to some extent over the next few weeks, although to what extent is yet to be determined. Winter wheat generally needs one good rain in the fall to establish it ahead of dormancy, with spring rains then being the primary determiner of yields. Those spring rains didn't come for the 2022 hard red winter wheat crop, while we can only speculate on whether they'll come for the current crop. Problems in the Black Sea with the Ukraine war makes this a greater concern, but it's too soon to panic about the U.S. crop. It's still possible to "plant in the dust and the bins will bust," as the saying goes.
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A strong super El Niño has started, but the crop damage that would lift food prices is still expected to land between September and December. Indian wheat area and Southeast Asian palm oil production sit at the front of the transmission chain, with Brazil the larger unresolved question.
Damage to Black Sea ports has stalled grain exports, but the more serious risk is now forming on the farm. Collapsed farmgate prices and a Russian fuel crisis have put part of the wheat harvest in question.
August 13 – The major stock indices traded quietly mixed overnight ahead of this morning’s weekly job numbers and producer price index data. Like Wednesday, this morning’s data was considered good as well, providing support for stocks while generally allowing Treasury yields to slip a bit lower. The VIX is trading near 14.4, which is just above yesterday’s new low for the year. The dollar index is trading near 99.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.15%. WTI crude oil is trading near $81 per barrel, while Brent trades near $87 per barrel. Wheat prices again firmed overnight on geopolitical risks in the Black Sea Region, while corn and soybean prices pulled back modestly from yesterday’s big gains.
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