Perspective: Morning Commentary for December 1

By: Arlan Suderman, Chief Commodities Economist

Wed, 01 Dec 2021, 14:34

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 1 – The roller coaster ride continues on Wall Street, with stock futures rallying overnight following sharp losses for the markets on Tuesday. Fears eased on Wall Street overnight as traders turned the calendar to December, which has a historical trend of strength for stocks. Yet, gains remain limited by the two biggest current perceived threats to the economy – inflation and the Omicron variant of Covid-19. Look for funding the government and raising the debt ceiling to also be issues that rear their heads in the days ahead, although Wall Street tends to assume that Congress will act at the last minute to save the day on those issues. The VIX slipped below 24 this morning as tensions ease on Wall Street, while the dollar index pulled back to trade near 95.8. Yields on 10-year Treasuries are trading near 1.48%. Crude oil prices are up more than 3% this morning, but they backed well-off their highs when OPEC+ posted big projected surpluses for the months ahead. That helped curb some of the notable gains seen in the grain and oilseeds overnight as well.

The private sector added 534K jobs in November, according to this morning’s ADP employment report. That was down from 570K jobs created in October, but up from analyst expectations of 525K jobs. The ADP report provides some insight into what we may expect from Friday’s big jobs report from the government, although the two don’t always track together as much as one would expect. Nonetheless, analysts expect Friday’s jobs report to show that the economy created 543K non-farm payroll jobs in November, up from 531K the previous month. Analysts also expect the unemployment rate to tick lower to 4.5%, with average hourly earnings up 0.4% month-on-month and up 5.0% year-on-year.

Federal Reserve Chair Jerome Powell abandoned his claims yesterday that inflation in the United States is transitory. He did so on the day that the European Union released data showing record inflation for the economic block. Both regions also face new challenges from Covid-19 amid the discovery of the new Omicron variant that now appears to have been circulating in the world for weeks. The ECB’s response to the above factors is to declare that it has no plans to raise interest rates in 2022, despite its mandate to contain inflation at 2%, with little wiggle room. Powell’s comments before the Senate Banking Committee on Tuesday led some to believe that he may be willing to speed up both tapering and interest rate hikes to contain inflation before it gets out of control. That would suggest that we will see the ECB and the Fed moving in opposite directions with monetary policy, which helps explain the recent strength of the dollar relative to the euro in global currency trade. Keep in mind that the slowing of Fed asset purchases removes demand for government debt certificates at a time when Congress is trying to accelerate spending. It already passed the $1.2 trillion infrastructure bill, and it continues to seek a way to pass its massive domestic spending bill. That could further accelerate the upward move of interest rates.

The Omicron variant of Covid-19 is likely present in at least 24 countries around the world, according to the World Health Organization. The WHO reports that most reported cases are mild, with no severe symptoms yet reported from the new variant that some experts think has been circulating around the globe for several weeks. Travel bans have been implemented by 56 countries, even though it appears to have already spread to many parts of the world. Politicians and health leaders feel the need to do something, so they implement restrictions. Nobody wants to be accused of not doing enough. After all, it is the job and mindset of healthcare workers to reduce risk. On another note, China reported 91 domestically transmitted Covid-19 cases on Tuesday, up from 21 cases the previous day and the highest daily count since November 2^nd. All of the cases came from Inner Mongolia in northern China, with none of them believed to be the Omicron variant. Most of the cases are along the border with Russia.

The broader commodity sector found active buying interest overnight, following recent sharp losses largely tied to Omicron fears. End users saw the opportunity to extend forward coverage at lower price levels, while many speculative buyers saw similar opportunities to re-engage with the sector as an inflation play. OPEC is meeting to discuss its output quotas today. Those meetings expand to the OPEC+ group tomorrow, which includes Russia and others. The edible oils have largely correlated well with crude oil prices over the past month, which has then impacted soybean prices as well. There’s little reason for corn prices to trade at current levels based on old-crop fundamentals, but corn traders are focused on high crop input prices that continue to push higher threatening global 2022 production. World wheat end users see the latest price break as a golden opportunity to extend coverage.

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August 6 – Stocks remain quietly mixed at midday as both the S&P 500 and Dow Jones remain just below their fresh all-time highs put in yesterday. This is allowing the VIX to cool to a four-week low below the 15.4 mark, reflecting the collective sigh of relief in the market amid largely better than expected U.S. economic data today. The dollar remains quietly in the green in its relatively tight range this week, trading at 99.9 at the time of writing. Treasuries remain elevated but have cooled from their recent peaks, with 30-year yields trading at 5.189%, 10-year yields trading at 4.647%, and 2-year yields trading at 4.229% at midday. Crude oil also remains quietly in the green, with nearby WTI up 2.3% on the day trading near $76.80 and nearby Brent up 2.4% on the day trading near $81.40. The ags remain mixed, with the wheat complex now squarely in the red while corn and soybeans cling to small gains, and the livestock complex largely pushes lower.

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