August 9 – Stock futures tried to add to yesterday’s gains, but then they slipped negative this morning ahead of today’s trading session. The VIX is trading near 24 this morning, while the dollar index is trading near 103.2. Yields on 10-year Treasuries are trading near 3.92%, after probing above 4% yesterday, while yields on 2-year Treasuries are trading near 4.02%. Crude oil prices are again modestly higher today as they add more war risk premium to prices going into the weekend as tensions continue to escalate in the Middle East. The grain and oilseed markets firmed overnight, led by wheat prices, as traders position for Monday’s big USDA WASDE crop report.
Fears of a recession sent stocks tumbling starting last Friday and accelerating into the start of this week. I’ve previously outlined how many of the origins of that selloff were actually more related to a surprise change in monetary policy made by the Bank of Japan last week, triggering the beginning of what looks to be a massive unwind of the yen carry trades put on in recent years while Japan had negative interest rates and yield curve controls in place. Ben Bernanke, when he was Federal Reserve Chair, patterned U.S. monetary policy after the Japanese model during the Great Recession of 2008. That policy never worked for Japan, instead creating more problems for it than solutions. The Bank of Japan is trying to unwind that policy now that it is under new leadership, while many here in the States want to double-down on the policy. The primary thing that our central bank rejected of the Japanese policy was the negative interest rates. Europe did adopt those, and it didn’t work for either Europe or for Japan. The massive quantitative easing of the Japanese model, implemented in the United States and in Europe, was successful at injecting money into the economy and eased the initial pain felt by the economies of both, but there’s always a price to be paid when economies are not allowed to go through their natural process.
China’s consumer price index was 0.5% year-on-year in July, which exceeded analyst expectations of 0.3% growth, and it was up from 0.2% in June. The main contributor to higher inflation was a 20.4% year-on-year rise in pork prices. Core inflation that excludes food and energy rose by 0.4% year-on-year. But China’s producer price index was down 0.8% year-on-year in July, making it the 22nd consecutive month of deflation at the wholesale level.
Wheat prices posted double-digit gains overnight following another downgrade of French production for this year. Both quality and quantity have been a concern for the crop, with USDA’s current European production estimates seen as too optimistic. Europe’s Strategie Grain cut their production estimate by 5.8 million metric tons to 116.5 mmt, largely due to a sizeable reduction in the size of France’s crop to 25.6 mmt. France’s Ag Ministry cut its estimate by 3.3 mmt to 26.3 mmt. We’ve seen significant reductions this year in wheat production for both the Black Sea Region and for major producing areas of Europe. That’s more of an issue for the latter half of the marketing year, regarding the U.S. balance sheet, but it is more evidence that perhaps the world cash wheat market may be carving out a broad bottom currently. Traders expect USDA to modestly increase the size of the U.S. wheat crop on Monday, after surprising the trade with a massive increase in July.
The trade also expects modest increases to the size of the U.S. corn and soybean crops on Monday, but it’s holding its breath a bit on what surprises that USDA may have up its sleeve for those crops. This is the first time that we could see notable changes to planted acreage occur in the August WASDE report without a resurvey providing guidance. USDA historically would change planted acreage in October as farmer certification data became available via the Farm Service Agency. That was then moved up to September as the FSA gained efficiencies in processing the farmer certification data. This year, USDA says that FSA’s data is sufficiently processed to allow it to influence WASDE planted acreage estimates in the August report. That could mean either an increase or decrease in planted acreage, with good arguments for both. The FSA data is not thought to provide a good foundation in August for making changes to harvested acres, apart from the changes in planted acres.
