August 28 – Stock futures traded modestly higher this morning, boosted by a fresh round of policy changes by China aimed at restoring confidence in its financial markets. Wall Street now looks ahead to this week’s second read of the second quarter GDP data on Wednesday, followed by the monthly jobs report on Friday, within the context of Federal Reserve Chairman Jerome Powell’s hawkish comments delivered at Jackson Hole, Wyoming on Friday. Stocks have a modest upbeat tone to them this morning, largely on the China market developments. The VIX is trading near 16, while the dollar index is trading near 104.1. Yields on 10-year Treasuries are trading near 4.20%, while yields on 2-year Treasuries are trading near 5.06%, after probing above 5.10% earlier this morning. Crude oil prices are trading mixed this morning in quiet trade, while the grain and oilseed markets are mixed.
Chinese stocks surged higher to start the week before many of those stocks erased the majority of those gains before the end of the session. This morning’s edition of China Direct, published by our Shanghai office, noted that China announced multiple measures over the weekend aimed at bolstering China’s capital markets; attempting to bolster confidence in those markets. China cut its stamp duty in half, reducing transaction costs for market participants buying Chinese stocks. Analysts estimate that the move could return 130 billion yuan (US$17.83 billion) to investors in the form of waived fees. This rarely applied measure was last implemented during the 2008 global financial crisis. China also lowered margin requirements for investors buying equities to 80% of value from 100% previously. Similar policy changes implemented in the Great Recession led to a bull market run in 2009. Unfortunately, investors lack confidence in the ability of these moves to sustain that confidence amid weak economic data that continues to flow into the market, as illustrated by today’s collapse of the initial robust rally. Profits at China’s major industrial firms are continuing to improve, but they remain nearly 16% lower than the previous year. Private firms are doing better, with their profits improving at a bit better pace, although still down year-on-year.
Fed Chair Jerome Powell sounded a hawkish tone on Friday, when he addressed the economic symposium at Jackson Hole, Wyoming. The leaning of the tone wasn’t as surprising as the strength of the words that he used. Powell stated that the Fed’s monetary policy thus far had been minimally effective at reducing consumer spending, or at reducing inflation in the service sector that is heavily dependent on a tight labor market. Fed fund futures are now trading roughly 60% odds of another rate hike by the November Fed meeting, while also dialing back odds of the markets expectations for sharp rate cuts next year. The “higher for longer” rate message came through loud and clear in Powell’s comments, as he restated the central bank’s absolute commitment to the 2% inflation mandate. Higher interest rates tend to lead to larger carries in the grain markets, which the funds like to trade. That’s also a recipe for upward food inflation pressure, which eventually tends to bring money back to the commodity sector as a hedge against that inflation. The very strong inflation rates of 1980 represented a second wave of inflation, which is what the Fed is trying to avoid. The question is, will it be able to do so amid the fiscal spending problem and rapidly deteriorating Federal budget that I’ve previously addressed?
Pro Farmer released its yield estimates on Friday following a week of touring the Midwest corn and soybean crops. The publication pegged this year’s corn crop at 172.0 bushels per acre, while putting the soybean crop at 49.7 bushels per acre. Both come in below USDA’s August estimate of 175.1 and 50.9 bpa for corn and soybeans respectively. The market saw those as reasonable estimates that may still slip lower in the current weather pattern. It’s very mild across the Midwest this morning, although heat is expected to rebuild across the region as we head into the Labor Day holiday weekend, with much of September expected to see above normal readings – although normal is starting to trend lower as we move into autumn. Scattered showers are expected, but an overall dry pattern will likely remain in play across the majority of the Ag Belt over the next couple of weeks.
Drooping ears were observed in some corn fields with increased incidence last week. Corn ears typically droop after they reach black layer (maturity), but this year many are drooping as early as the dough stage. The drooping pinches off the flow of water and nutrients coming to the ear through the ear shank, resulting in lower yield potential. That potential can result in minimal to up to half of the yield potential of the ear, depending on the stage of maturity at which it occurs. The drooping ear problem is most prevent in Nebraska, western Iowa, and southeastern Minnesota – areas that saw extreme stress at times this growing season. It’s not every ear in that area either. Pro Farmer says that they accounted for the drooping ear problem in their yield estimate that they released on Friday, which suggests that while it is a significant problem in the fields in which it is occurring, it’s not a significant problem relative to the crop as a whole. But it is taking some of the top off this year’s crop. Nonetheless, the primary focus will continue to be on the potential additional soybean losses due to pod abortion or small beans in the pod, since that crop has a tighter balance sheet.
