January 13 – This is the week that we see updated inflation and retail sales data, while the hearings will also begin in the Senate for confirming President-Elect Trump’s cabinet nominees needed to carry out his agenda. Wall Street is now contemplating the possibility that there might not be any rate cuts coming from the Federal Reserve in 2025. Furthermore, traders reflected concern about steps taken today to further restrict artificial intelligence chip and technology exports, particularly to China. Stock futures pointed lower to start the week, with the VIX trading at a three-week high near 22 overnight as a result, while the dollar index is trading near 109.9, after hitting a fresh 26-month high overnight. Yields on 10-year Treasuries are trading near 4.77%, after hitting a 214-month high near 4.80% overnight, while yields on 2-year Treasuries are trading near 4.39%. Crude oil prices are more than 1% higher after hitting fresh five-month highs, while the grain and oilseed markets are all higher on Friday’s crop report.
The Federal Reserve’s Beige Book on economic activity is due to be released on Wednesday afternoon – the same day as the December consumer price data reflecting inflation trends to close out 2024. That makes Wednesday a critical day for the markets, which are bracing for the possibility that we might not see a single rate cut from the central bank this year, following 100 basis points of cuts in the final four months of 2024. Fed fund futures are still pricing in the possibility of a 25-basis-point rate cut as early as June, but confidence in that is slowly deteriorating following Friday’s strong monthly jobs report that reflected a solid employment market. Traders will now look to tomorrow’s producer price index data, followed by the consumer price data on Wednesday, the Beige Book that afternoon, and the December retail sales data on Thursday for greater clarity.
The Biden Administration stated today that it would add further restrictions on exports of artificial intelligence chips and technology as it seeks ways to keep China from gaining access to these technologies. Meanwhile, it will allow unlimited access to the technology for our closest allies in the world. Export restrictions would extend beyond China to Iran, Russia, and North Korea as well. The United States seeks to prevent the AI chip technology from benefiting China’s military capabilities. These new restrictions are scheduled to take effect 120 days following their publication, which would allow the incoming Trump Administration time to weigh in, although he has thus far expressed similar concerns regarding China’s access. Roughly 18 countries would be exempt from the restrictions, while 120 other countries would face caps on imports, while China, Russia, and Iran would be barred from imports.
Crude oil prices traded to their highest level since mid-August overnight as traders consider tighter global supplies amid stronger sanction enforcement on Russia by the Biden Administration. The sanctions have largely been in place for years, but the Biden Administration is now taking stronger actions to enforce those sanctions before leaving office, which is expected to limit supplies flowing to China and India. Those two buyers will now need to seek supplies elsewhere. The Trump Administration is also expected to enforce sanctions on Iran that have been in place for years, further tightening world supplies. Goldman Sachs released estimates that sanction enforcement could drive Brent crude oil prices above $85 per barrel in the near-term, with the possibility that they could rise above $90. That in turn could stimulate more U.S. production under the Trump Administration’s plan to remove barriers currently limiting output under the Biden Administration.
USDA slashed its 2024 U.S. corn yield by the largest amount of the past 30 years for the January report on Friday, although it matched the 3.8 bushel per acre reduction seen in January 2021 for the 2020 crop. The one-bushel reduction in its 2024 soybean yield was the single largest of the past three decades in the January report. USDA’s NASS statistical division surveys farmers on their yield expectations monthly from August to November of each growing season, while it samples fields objectively from September to November. It follows that up with one final producer survey in December, combined with a quarterly survey of stocks in all positions as a cross check of its production survey. Corn and soybean stocks both came in notably below expectations, suggesting that the yield estimates needed to come down – and this year come down by historical amounts – to make the math work. That matters most for corn, since we’ll continue to be the primary source of supplies in the world for several more months until new-crop Argentine supplies hit the market, whereas a big Brazilian crop is expected to hit the market in the next few weeks. Furthermore, we already know that corn demand is strong – both export and domestic – while questions continue to surround both export and domestic demand for soybeans. Chinese imports are expected to decline this year – perhaps by more than 10% - as demand flattens, while considerable questions remain about the Trump Administration’s support for using soyoil for renewable fuel production. The Biden Administration’s 45Z guidance released on Friday fell far short of providing the certainty needed by the industry.
