February 14 – Digesting the flow of news out of the White House is like taking a drink from a firehouse. The flow of headlines continues to flood the global markets with more possibilities to consider. Yet, stocks continue to trade at relatively high levels, and Wall Street seems to be developing a resiliency amid the flood of market-impacting headlines. For this morning, traders are assessing the January retail sales numbers within a backdrop of learning more about President Trump’s reciprocal tariff plan. The result thus far is that stock futures are mixed to weaker, while the commodity sector is generally well supported this morning. The VIX is trading near 15, reflecting a relative calm on Wall Street, while the dollar index is breaking to a fresh nine-week low to trade near 106.7. Yields on 10-year Treasuries are trading near 4.47%, while yields on 2-year Treasuries are trading near 4.26%. Crude oil prices are modestly higher, while the grain and oilseed sector was stronger as well, led by double-digit gains in wheat.
Retail sales fell a seasonally adjusted 0.9% on the month in January, while the December number was adjusted upward from 0.4% up to 0.7% growth. So, a stronger December than first reported and a weaker January than expected. That fits with the decline in consumer sentiment that we saw in January. Analysts had expected a 0.1% decline in January. Retail sales minus vehicles fell by 0.4%, while December was also upwardly revised from 0.4% up to 0.7%. Analysts had expected 0.3% growth in retail sales minus vehicles. Retail sales minus vehicles and gasoline fell by 0.5%, which was a turnaround from the 0.5% gains seen in December. These numbers provide more evidence that the economy slowed somewhat in January as the consumer became more wary of the uncertainties of tariffs as President Trump came into office.
President Trump unveiled the framework of his reciprocal tariff plan on Thursday afternoon, providing a bit more clarity on the direction of his tariff-related strategies. The announcement seemed to ease some of the concerns of the market, particularly in the commodity space. One thing that became clearer in the plan is the objective of bringing countries to the table. Many countries charge us tariffs for what we export to them – some of them quite high. The objective is to use the expectation of reciprocal tariffs at the rate that they’re charging us, in order to bring them to the negotiating table to lower those tariffs. The goal is to achieve trade agreements that lower tariffs for both parties, freeing up trade. If achieved, that would not be inflationary, but rather it would reduce inflationary pressures. Of course, that is the lingering debate – will it be possible to achieve the objectives.
The commodity world stands to gain if the plan is successful in achieving trade agreements that increase trade, as was reflected in overnight prices. For example, Brazil charges an 18% tariff on U.S. ethanol, preventing it from coming into the country. Reciprocating that tariff could bring Brazil to the table to negotiate an agreement to reduce or eliminate the tariff, resulting in increased flow of U.S. produced ethanol into Brazil. India charges some of the highest tariffs in the world, but it is already offering deals to avoid counter tariffs. One of the reported offers would be for India to also implement a 15 – 25% tariff on steel imported from China. India is looking for ways to partner with the United States in protecting it from the growing power base it sees in China. That obviously has China on alert.
Trump’s ultimate goal appears to be to contain China’s expansion of economic and military power. President Regan implemented policies that resulted in the collapse of the U.S.S.R in the 1980s. He did so by out-spending it on defense, leading it to economic collapse. President Trump similarly appears to be strategically hitting at the strength of China. China’s economy remains handicapped by its response to Covid. It is currently mounting up record debt to stimulate its economy. Trump’s strategies continue to put pressure on its economy, necessitating that China continue to escalate its stimulus to both prop up its domestic economy, while also trying to push projects oversees that will buy the loyalty of other countries. Trump is using his tariff policy to apply this pressure on China’s export-based economy – it would raise tariffs by 10 – 15% on China – while also using it to get other countries to the negotiating table to facilitate trade with us rather than China. The goal would appear to be to weaken China without ever needing to engage in military conflict, similar to how Regan brought down the U.S.S.R.
The broader commodities interpreted the above in a positive light. In the end, supply and demand balance sheets need to reflect better fundamentals, but the initial response was to bring a fresh round of buying to the sector. Global corn and wheat stocks among major exporters as a percent of expected use is at a generation low 9%, leaving little margin for error, while requiring the world to come to our ports to shop. Wheat prices led the way, with extreme cold expected to flood the U.S. winter wheat belt over the coming week, while the Russian crop has some vulnerabilities as well. Demand for corn is strong, wheat demand is strengthening, and soybeans are along for the ride for now.
