August 29 – Wall Street is back to its winning ways this morning, following yesterday afternoon’s earnings report from Nvidia that failed to disappoint. The growth curve may be slowing, but traders were not disappointed with the report, citing the enormity of the infrastructure that must still be developed to support artificial intelligence. The focus now shifts to tomorrow morning’s inflation data ahead of a three-day holiday weekend, and next week’s highly anticipated monthly jobs report. The VIX is trading near 16 this morning, while the dollar index is trading near 101.4. Yields on 10-year Treasuries are trading near 3.87%, while yields on 2-year Treasuries are trading near 3.89%, with the inversion nearly gone. Crude oil prices are 2% higher this morning amid more cuts to Libyan production due to ongoing strife there, while the grain and oilseed sector was mixed to higher, with soybeans leading the way higher this morning on ideas that the recent heat wave took the top off this year’s crop, that still remains quite large.
First-time claims for unemployment benefits slipped to 231K in the week ending August 24, down from 233K the previous week, but above expectations of 230K claims. The four-week moving average for claims dropped to 231.5K, down from 236.25K the previous week. Continuing claims for the week ending August 17 rose by 13K to 1.868 million, after the previous week’s total was revised lower by 8K. The four-week moving average slipped by 250 to 1.863 million. Weekly claims are running within the typical range for this time of year. Other data released this morning included updated data for 2nd quarter gross domestic product. The data shows that 2nd quarter GDP rose at an annualized rate of 3.0%, up from the 2.8% originally reported. Personal consumption expenditures rose by 2.9%, which is a big upward adjustment from the 2.3% originally reported. We also learned this morning that corporate profits were up 11.2% year-on-year after taxes in the 2nd quarter, while profits after adjustments for inventory and consumption were up a solid 6.6%. The above numbers do not argue for an aggressive rate cut schedule.
U.S. National Security Advisor Jake Sullivan completed his three-days of talks in Beijing today. About the only agreements that he could reach with his Chinese counterparts was a) a potential phone call between Chinese President Xi Jinping and U.S. President Joe Biden in the coming weeks, b) discussions between military heads to try to avoid accidental war, and c) agreements on law enforcement and climate change. The two sides remain far apart on the more critical issues of Taiwan, the South China Sea, and Russia’s war on Ukraine. The United States stands behind Taiwan’s efforts to remain independent, as well as standing beside the Philippines, who continue to have clashes with Chinese military vessels that are trying to assert control of the South China Sea shipping lanes. Chinese Foreign Minister Wang Yi told Sullivan that “Taiwan belongs to China, which must be reunified.” He went on to urge the United States to execute its commitment not to support Taiwan independence. China would like to play the long game in gaining control over Taiwan to avoid a direct conflict and to preserve its infrastructure and chip-making capabilities. But the combination of China’s economic problems, Xi’s age, and the upcoming U.S. elections, may bring the issue to a tipping point sooner rather than later.
A direct conflict over Taiwan could have significant impacts on U.S. commodity trade with China, which is the world’s largest importer of commodities. There would be an assumption in the marketplace that a direct move to take control of Taiwan would be met with sanctions from the United States that would make the purchase and delivery of commodities challenging. Coincidentally, China has been building inventories of some essential commodities, such as crude oil and soybeans, among others. Ironically, China has been busy booking shipments of Brazilian new-crop soybeans for import in February, March and April, with over half of its anticipated needs already on the books for March arrival. But it has booked less than 10% of the one-billion-bushel plus anticipated needs for the four months ending in January. That’s a time when it traditionally leans on U.S. supplies. It has picked up the pace of buying from the United States in recent weeks, but its purchases thus far are much below the typical pace. The easy explanation is that it expects prices to get even cheaper, but one also has to wonder if it has plans to lean on its recently built reserves to avoid dependency on U.S. supplies this fall. China is expected to harvest bumper corn and soybean crops of its own over the next several months as well.
USDA reported this morning that new-crop soybean sales in the week ending August 22 totaled 96.1 million bushels, with 32 million of that on the books for China. That brings total new-crop soybean sales to all destinations to 373 million bushels ahead of the start of the new marketing year on September 1st. The 10-year seasonal pace needed for new-crop commitments by September 5 in order to hit USDA’s aggressive 1.850-billion-bushel target is 707 million bushels. We can still hit USDA’s target, but it would likely take a very short Brazilian crop in the coming growing season to do so.
