July 24 – It’s Fed week on Wall Street. Fed fund futures trading is now pricing in 100% odds of a 25-basis point rate hike on Wednesday, but stock futures have a firmer tone to them this morning because that’s the last rate hike expected by traders, with rates then expected to decline by 100 to 125 basis points during 2024 – at least that the expectation being priced in by the market. That longer-term optimism then allows commodity traders to focus on escalating tensions in the Black Sea Region that create greater risk for future shipments of food and energy commodities. The VIX is trading just above 14 this morning, while the dollar index firmed to trade near 101.2. Yields on 10-year Treasuries are trading near 3.81%, while yields on 2-year Treasuries are trading near 4.83%. Crude oil prices are surging above the 100-day moving average for the first time since the end of August, while grain and oilseed prices are posting strong gains as well following an expansion of Russia’s strategy to block Ukrainian exports, combined with a rise in late-week rhetoric from President Putin directed toward Poland. Suddenly traders have interest in putting a war premium back into commodity prices.
The Chicago Fed National Activity Index is constructed from other pre-existing economic data points to equal zero during times of trend economic growth, with a standard deviation of one. The index for June came in at -0.32 this morning, which fell below analyst expectations of +0.03. Furthermore, the May reading was revised to -0.28, down from the -0.15 originally reported. The bottom line is that analysts expected the index to reflect trend economic growth in June, which would be an improvement from below-trend growth in May. However, May was revised lower, and the June number confirmed below-trend economic growth. The three-month moving average was also negative at -0.16. The first reading for second quarter gross domestic product is expected to be released on Thursday, with analysts expecting it to show 1.5% growth during the quarter.
Russia showed its true colors today. Part of the stated reason for withdrawing from the Black Sea Grain Initiative was Russia’s complaint that not enough Ukrainian grain was going to the poorer countries of the world. Ukraine publicly stated that it would find other ways to ship grain, and Russia promptly started bombing Ukraine’s ports that would make such shipments possible. That included last night’s bombing of the Reni Seaport on the Danube River that provides a border between Ukraine and Romania. This is probably the most important attack on Ukraine’s export capabilities seen to date since the war started in February 2022. Air strikes on port facilities at Odessa can be explained away as a consequence of doing business in a war zone, but the strike on the Reni Seaport clearly had one objective – to stope Ukraine food grain shipments to the world. That means that infrastructure facilitating exports over land may now also be considered as potential targets.
Russia appears determined to withhold as much Ukrainian grain as possible from the world market – not only now, but longer-term as well. It will take quite some time to rebuild the infrastructure being damaged by these attacks. The markets are responding more to the escalation of the war that will negatively impact grain shipments longer-term than they are the immediate impact. Russia continues to dump cheap wheat on the world market, and Brazil’s record harvest has the world well-supplied with corn near-term. But the longer-term implications of destroying the export infrastructure of a major world exporter have bigger implications. Plus, the rapid escalation of the war raises risks that Ukraine could retaliate in a way that negatively impacts Russian export capabilities as well, which could dramatically impact world supplies in the near-term. This also has implications for rising inflation.
USDA’s weekly crop progress and condition report is due out this afternoon. I expect it to show another week of improving conditions, although this week’s improvements should be more modest than those of the past couple of weeks. It will be hot across much of the Midwest this week, especially over western areas of the Ag Belt, where readings are expected to top triple-digit levels. Forecasters still expect to see storm clusters riding around the high-pressure ridge to provide some moisture for the region, although overall coverage is expected to be below normal, returning stress to the crops. As such, look for crop ratings to decline next week, and possibly the week after, depending on the duration of the current weather pattern. But the real impact on final production numbers will hinge on August weather, which forecasters remain in disagreement about. Our forecasters continue to lean cooler and wetter, which would provide a favorable grain fill period for this year’s corn and soybean crops, but first we need to see if this week’s high-pressure breaks down as we turn the calendar, or if it locks in place.
