August 26 – Increased fighting in the Middle East brought a sober end to Wall Street’s celebration over the weekend after Federal Reserve Chair Jerome Powell gave the Street what it wanted – a solid statement of a policy pivot toward rate cuts, likely starting with the September meeting. That provided ongoing support beneath stocks through the weekend, with crude oil prices supported as well. However, stock gains were limited by rapidly escalating geopolitical risks in the Middle East. The VIX is trading near 16 at this hour, while the dollar index is trading near 100.8, after setting fresh 13-month lows overnight. Yields on 10-year Treasuries are trading near 3.81% this morning, while yields on 2-year Treasuries are trading near 3.92%. Crude oil prices are nearly 3% higher, while the grain and oilseed markets came under pressure overnight, responding to bearish yield estimates from the Pro Farmer Midwest Crop Tour on Friday.
Headline durable goods orders rose a robust 9.9% in July, a reversal from the -6.7% posted in June, and up from analyst expectations of 4.5%. Durable goods minus transportation came in at -0.2%, with June revised down to +0.1%, down from the 0.5% originally reported. Core durable goods orders were up 0.1%, versus 0.5% the previous months and versus analyst expectations of 0.1%. The June number was revised in half. The bottom line is that the durable goods revisions were mostly negative, and the current numbers were unimpressive beyond transportation.
Iranian backed Hezbollah began its retaliatory strike on Israel over the weekend for the killing of its commander back on July 30th in Beirut. The group sent more than 320 missiles into Israel, followed by drones. But Israel was ready, sending 100 warplanes into southern Lebanon to take out thousands of rocket launchers aimed at Israel as the attacks began. The damage in Israel appears to be limited at this point, and Hezbollah says that its operation is completed. A 48-hour state of emergency was declared in Israel, but the immediate threat appears to be over for now. Nonetheless, the risks remain that this is going to continue to escalate into a broader war on two fronts that could eventually include Iran, and possibly other areas of the Middle East. This will keep the markets vulnerable to headline risk in the days and weeks ahead, including both the financial markets as well as the commodity markets.
Fed Chair Jerome Powell gave the green light for economic optimism on Friday when he stated that the time for a change in policy has arrived. I covered his comments in detail in my Midday Commentary on Friday, but the bottom line is that the Federal Reserve is no longer focused on controlling inflation, but it has now shifted its focus to sustaining employment. As such, there will be a lot of focus on the next monthly jobs report to come out in early September. The current thinking is that we get a 25-basis-point rate cut in mid-September, but a “bad” jobs report could switch that to a 50-basis-point reduction. The Fed clearly tried to communicate that the data will drive the scope of the cuts, and that the markets should be patient, expecting a measured pace on the cuts, but Wall Street is celebrating, nonetheless. We would normally expect an immediate response in consumer spending, but the rate cuts are so heavily advertised that we may see the consumer be patient with big ticket items, waiting for lower interest rates before purchasing. Meanwhile, the decline in the dollar continues as Treasury yields trend lower, spurring more yen-carry trade unwinding. The weaker dollar should eventually be supportive for the commodities, but soft demand is currently the concern there.
Pro Farmer pegged this year’s soybean crop at 4.740 billion bushels on Friday, on a record 54.9-bushel-per-acre yield following nearly perfect growing conditions this summer. If verified, such a crop would be 151 million bushels above USDA’s August estimate. That risks pushing projected 2024-25 ending stocks above 700 million bushels if demand is held constant, and one can argue that USDA’s export target was inflated when considering the relatively low level of commitments thus far. As such, the job of the marketplace currently is to create demand with lower prices, while also trying to discourage planting in South America as farmers there prepare to plant their next crop. Pro Farmer pegged the corn crop at 14.979 billion bushels on a yield of 181.1 bushels per acre. That’s 168 million bushels less than forecast by USDA earlier this month on a yield that came in below USDA’s 183.1 bpa estimate. However, the trade sees this as confirmation of USDA’s estimates, since Pro Farmer’s corn yield estimates tend to come in below USDA’s final estimates about 75% of the time over the past dozen years. So, Pro Farmer’s corn production number may have given traders a sigh of relief that it wasn’t bigger, but it still wasn’t small enough to justify sustaining a rally. Grain and oilseed movement isn’t directly impacted by the Middle East tensions, but they are indirectly affected. The conflict continues to make it high risk to ship grain through the Red Sea, raising shipping costs and lengthening trade routes. However, corn and soybeans are seen as feedstocks for biofuels, so traders will be monitoring the impact of the conflict on crude oil prices.
