July 30 – Stock futures were quietly mixed overnight as the Federal Open Market Committee prepares to begin two days of meetings to determine future monetary policy for the United States, and as traders wait for more earnings reports from big tech firms. The VIX is trading above 16 this morning, while the dollar index is trading near 104.7. Yields on 10-year Treasuries are trading near 4.16%, as they sit just above four plus month lows, while yields on 2-year Treasuries are trading 4.39%, as they sit just above six-month lows going into this Federal Reserve meeting. Crude oil prices are carving out fresh seven-week lows on soft demand concerns amid a sluggish Chinese economy, while the grain and oilseed sector was again mostly lower today – also on soft demand concerns.
The Fed begins two days of meetings today, with Wall Street solidly convinced that it knows the product of those meetings already. The Fed is not expected to make any policy changes in this week’s meeting, but traders do expect it to alter the wording of its policy statement – and of comments made at Wednesday afternoon’s press conference – to prepare the markets for a string of rate cuts. That’s right, a string of rate cuts. Not just one – but essentially a rate cut at nearly every meeting from September through next year. That is not in my expectations, but that is how The Street currently sees things. That sets up the risk of market disappointment, should the Fed take a different direction. We’ll see the JOLTS job opening and job quits data later today to provide additional input. Fed members will obviously have a chance to see that data as well. However, Friday’s big monthly jobs report will come after Wednesday’s policy statement from the Fed.
China’s Politburo is made up of 24 members of the Chinese Communist Party, assigned to the committee by the seven highest members of the Party who lead the country, of which President Xi Jinping is one of those seven. The Politburo met this week to discuss policy for China, including some of the country’s economic challenges. This week’s meeting failed to provide the markets with any fresh news or headlines that would reassure investors that China’s leadership are prepared to fix its economic problems. Rather, investors saw more vows for action, and promises for more policy measures as soon as possible. There was a promise to accelerate issuance of 300 billon yuan of ultra-long maturity government bonds targeting industrial upgrades and support for China’s consumer goods trade-in program. This allows more room for fiscal stimulus the remainder of the year – perhaps after the U.S. Federal Reserve begins to cut rates. Chinese authorities are committed to supporting the value of the yuan as a strong alternative to the dollar, and they fear that too much stimulus now when U.S. rates are high would further weaken the yuan. We see signs that China is intervening to support the yuan, trying to prevent it from eroding weaker and losing global market share while U.S. rates remain high.
USDA surprised the trade Monday when it raised its corn condition rating to 68% Good to Excellent, up one point on the week, versus the typical one-point decline expected this time of year. The increase came despite a hotter drier period last week. Instead, we saw ratings rise in nine states over the past week, while declining in six – those six mostly in the hotter and drier western Plains portion of the Corn Belt. Condition index scores for the crop – that take in all five categories of the condition ratings – are now higher than the five-year average for the week in a dozen of the top 18 production states, while lower in six. My seasonally adjusted corn yield model currently sits at 183.8 bushels per acre, up from 182.4 bpa the previous week, and above USDA’s trend yield estimate of 181 bpa. NDVI scores this week for the top 18 producing states are above average, but below where last year’s numbers were at this point in the season. However, this week’s NDVI scores are higher than they were in late July in 2004, 2009, and 2014 – all years that saw final yields far above trend levels. In fact, the final yield in 2004 came in 10.6% above trend, which would give us a yield of 200 bushels per acre. However, I must also add that the subjective crop ratings were all considerably above this week’s rating in those three years, while last year’s crop had a much lower rating than this year’s. So we saw an opposite story in the subjective crop ratings than what we saw with the NDVI scores. StoneX’s official yield estimate will be its customer survey to be released on Thursday.
A surge in Brazilian farmer selling softened basis enough to again make Brazil soybeans cheaper than U.S. supplies over the past week. Farmers there took advantage of a pop in the futures market, combined with weakness in its currency, to sell an estimated 1 million metric tons of soybeans per day for several days last week, with Chinese buyers jumping in to take advantage of the surge in cheaper supplies. We had previously seen China switch to U.S. soybeans for September delivery, but now Chinese buyers have committed 2 mmt of Argentine and Brazilian soybeans for September. Overall purchases are slowing dramatically as supplies back up at Chinese ports amid a strong delivery pace and slowing demand for soymeal.
