Perspective: Morning Commentary for December 19

By: Arlan Suderman, Chief Commodities Economist

Mon, 19 Dec 2022, 14:08

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 19 – Stock futures had a firmer tone to them overnight in relatively quiet trading, following the past week’s big selloff. The overnight bounce was largely just that – a bounce. The flow of economic data slows this week as we head into the Christmas holiday, when many traders would like to spend some extended time with family. Concerns about the U.S. economy top the agenda as we slip into the holiday, while traders are also keeping their eyes on the rapid spread of Covid in China. That’s short-term negative for commodity demand and for the global economy, while it does raise hopes for a strong recovery starting in the second or third quarter of next year. The VIX traded very quietly just below 23 overnight, while the dollar index traded near 104.7. Yields on 10-year Treasuries are trading near 3.57%, while yields on 2-year Treasuries are trading near 4.22%. The inverse between the two remains large, but it is narrowing. Crude oil prices are modestly higher this morning after trading both sides of unchanged overnight, while the grain and oilseed markets were mostly lower, although well off their session lows.

Covid is hitting China quick and hard, but that should allow it to recover quicker if it can survive the virus’ initial punch. Rapidly rising Covid numbers have most people in China avoiding crowds. China’s official data shows Covid numbers peaking already in many cities, with other cities expected to peak in the next week or two. Today’s edition of China Direct, published by our Shanghai office, states that the majority of China’s 1.4 billion people will have acquired Covid by the second half of January, which is much quicker than initially expected. As such, the government is racing against time to boost medical care in rural areas of the country, while increasing the vaccination rate among the nation’s large elderly population.

Covid deaths are minimal thus far, although the true test will be when the virus spreads through the country’s massive rural elderly population. The general pattern to this point has been that Covid patients require one to two weeks to recover, although some have been hit harder by the symptoms than others. Regardless, this creates a vast shortage of workers to keep factories operating, adding to supply chain disruptions. Many delivery services are also shut down due to a lack of workers, even as online shopping increases as people stay at home. Many stores and businesses are either closed or are operating at limited capacity. As such, retail sales and general demand for commodities is expected to be soft this winter, with the recovery coming at some point in the second or third quarter. The optimist sees a strong second quarter recover, but that’s pure speculation at this point since we’re still fairly early in the spread of this virus. One thing that we do know is that the Chinese people increased their savings over much of the past year due to all of the Covid lockdowns and restrictions. They have more money to spend once the economy truly does reopen next year. That should support a strong rebound in the economy when it does happen, and that should be good for commodity demand, as well as for the global economy.

The markets are increasingly desensitized to developments in the Ukraine war, as many fund managers simply do not know how to interpret all of the data emerging from the war. But this is what we know. Ukraine was part of the massive Black Sea “breadbasket of the world” that included primarily it and Russia. Russia had a bumper crop in 2022 that helped offset a 40% decline in Ukrainian production. That won’t always be the case. Ukraine’s production is expected to fall again in 2023, perhaps by a similar factor. It will take years to rebuild production in Ukraine due to the destruction of its infrastructure and economy, but the current focus is on maintaining exports and sustaining production capability. Ukrainians remain resilient optimists, but they site three limiting factors for planting their 2023 crops. First, farmers lack money to put the crops in the ground. That’s one of the reasons that officials are working so hard to maintain exports, to provide funds for the coming year. Second, they lack seed for planting the next crop. You can’t plant what you don’t have. Third, they lack electricity. Much of Ukraine’s power structure has been destroyed by Russian missile and drone attacks over the past couple of months. Those are the top shortages identified by Ukrainian officials, but fertilizer and other crop inputs could be added to the list as well.

Severe cold will spread south and east across areas of the United States east of the Rocky Mountains later this week, with many areas seeing snow and / or ice as well. Grain movement will be slowed, while livestock will be stressed. High winds will keep wind chills dangerously cold late this week across many areas of the Plains and Midwest. Wheat will be at risk of winter kill in areas lacking adequate snow cover – most notably in eastern Colorado and western Kansas. Many areas will see a white Christmas, although it will be a cold one.

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