July 29 – Stock futures saw modest follow-through buying from Friday’s strength overnight, while the commodities faced headwinds once again. This is Fed week on Wall Street, with all eyes on this week’s meeting of the Federal Open Market Committee meeting that will conclude with statements on Wednesday afternoon, followed by the monthly jobs report on Friday morning. The VIX is trading just below 17 at this hour, while the dollar index is trading at its highest level since July 11th at 104.6. Yields on 10-year Treasuries are trading near 4.16%, which is just above four-month lows, while yields on 2-year Treasuries are trading near 4.38%, which is just above six-month lows. Crude oil prices are modestly weaker this morning, on lingering concerns about China’s deteriorating economic outlook, while the same is true for the grain and oilseed markets as well, although soybean prices are down more substantially again following Friday’s collapse. Managed money is currently excited about the possibility of rate cuts to stimulate the U.S. economy, but fearful that global demand signals are still too weak to match up with rising commodity supplies.
The Federal Reserve is expected to hold the line on any changes to its benchmark interest rate one more time when it meets this week. But it is expected to change the wording in its official statement, as well as in comments given in the press conference to follow, to pave the way for a September rate cut. Fed fund futures reflect nearly 100% certainty now of a September rate cut, while also pricing in additional rate cuts in the following meetings to get the benchmark rate 200 basis points lower by 2026. That would be a tremendous amount of stimulus, which is what has Wall Street giddy over the possibility, but it would also be inflationary in nature. I do believe that the Fed will likely go forward with the September rate cut, unless something drastically changes between now and then, but I’m much less convinced that we’ll see three rate cuts by the end of the year, as the market is trying to price in currently. Keep in mind that we have a lot of job data and inflation data coming out between now and the September meeting, including and starting with Friday’s jobs report.
A decision handed down by a federal appeals court accelerated selling in the soyoil, soybean, and corn markets on Friday, with follow-through selling overnight last night. The appeals court rejected the Environmental Protection Agency’s 2022 decision to deny small oil refineries temporary waivers from the U.S. biofuels blending program, while sending the matter back to the EPA for further review. The ruling was a major win for the oil refining industry that has resisted the requirement to blend biofuels as part of the Renewable Fuels Standard that was first authorized by Congress nearly two decades ago in 2005, and then expanded in 2007. The court’s decision wasn’t the only reason that corn, soybean and soyoil prices were down on Friday, but it was a significant contributor. Prices were already under pressure due to improving weather forecasts that resulted in traders removing some weather premium that had been added to prices earlier in the week, but the court’s decision added downward momentum that gave the momentum-trading Algos a field day. The decision doesn’t automatically mean that all exemptions are waivers are granted, but it does open the door to the possibility that a significant portion of them, if not all, will now be granted, reducing the demand for biofuels and/or renewable identification numbers (RINS). The value of those RINS is a big part of the biofuel revenue needed to justify their production.
Friday’s markets started lower as forecasters changed their tune on Midwest weather, believing that high pressure bringing intense heat to the center of the country would revert back west after a brief bout with heat and dryness. That still appears to be the case this morning as well, with forecasters expecting improving rain chances this week for the eastern 80% of the belt, with the western 20% seeing improving chances in the 11- to 15-day period. I covered this extensively, including graphics, in my Perspective Midday Commentary on Friday. A majority of the Midwest experienced mild and wet conditions through the bulk of July. That’s the pattern that gave us both condition ratings from USDA and NDVI ratings from the satellite data that for most areas are above average for this time of year, suggesting that we could still see above trend yields for this year’s corn and soybean crops. We’re currently seeing heat focused primarily in western areas of the Midwest that is expected to revert west again this weekend, taking us back to something close to what we had for much of July. Most at risk of missing out on the needed rains will be the southwestern fifth or so of the belt. Private production estimates based on customer surveys and field tours will begin coming out as we head into August, starting with StoneX’s estimates on Thursday afternoon. This will begin to give us a better feel on whether this year’s crop potential is as good as the crop ratings and NDVI scores argue. Those NDVI scores are above average for the Midwest, although below last year’s levels. Yet, they are above levels seen in late July in 2004, 2009, and 2014 – each years that saw final years substantially above trend levels. Now we need to see how August weather will impact that yield potential.
