June 16 – A modest “risk-on” sentiment spread across Wall Street this morning, ahead of a three-day holiday weekend, with the markets closed on Monday. Wall Street is moving past rate hike expectations to focus on hopes and expectations of a recovering economy, with the VIX trading near 14 again this morning. Meanwhile, the dollar continues to trend lower as the European Central Bank sustains its hawkish ways, setting up a possible triple-bottom for the greenback. The dollar index is trading near 102.2 this morning. Yields on 10-year Treasuries are trading near 3.74%, while yields on 2-year Treasuries are trading near 4.71%. Crude oil prices are trading steady, as money flows into the broader commodity sector amid returning economic optimism and a weaker dollar, while the grain and oilseed trade is higher as well, with an added boost from continued dry weather over the Midwest.
Chinese power consumption rose 7.4% year-on-year in May, down from 8.5% growth in April. Keep in mind that those increases come off a low base last year when much of the country was in a lockdown due to Covid. Power use in the industry and manufacturing sector rose 4.1% year-on-year in May, which is down from the 7.6% increase in April and 6.4% growth in March. Power use in the service sector jumped 20.9% year-on-year in May, up from 17.9% growth in April, according to today’s edition of China Direct. But the most interesting stat was the unexpected jump of 8.2% in residential power use year-on-year in May, up from 0.9% growth in April, and a contraction of 5.7% in March. The May growth was curiously strong since people returning to work would generally use less power. One could point to an increase in EV car ownership for the rise, and the need to charge those cars. But that doesn’t correlate with the pace of car acquisition. Rather, the steep surge in power use in the residential sector may be a product of more unemployed people who are now staying at home while they look for a new job, with recent data showing a rise in unemployment – especially among young people.
Russia continues to threaten to pull out of the grain initiative that allows Ukraine to export through three approved terminals in the Odessa area. The market is becoming somewhat desensitized to these threats by Russia, for traders have heard these comments for months. Yet, there is some sense of reality starting to emerge that the grain initiative may be coming to an end. Ukraine grain exports fell to roughly 4.5 million metric tons in May, down 3 mmt from March, with shipments via water and overland to the west both in decline currently. June will likely see an additional reduction. Even the ever-optimistic United Nations is now conceding that the grain initiative is likely reaching an end. Ukraine says it has a “Plan B” that will subsidize insurance for shippers still willing to risk movement in and out of Ukrainian ports, so some grain is likely to continue to move unless/until a ship or two goes down. But Ukraine’s increased weapon availability means that more than just ships leaving Ukraine are vulnerable. This could put ships leaving Russia at risk as well, which would have far greater market implications, should it happen. Wheat prices are at the low levels they are largely because Russia continues to dump large volumes of cheap wheat on the world market. We have to assume that will continue, until it doesn’t anymore. Russia could choose to disrupt those shipments, or an act of war could do so. That’s the ongoing risk of the region.
Rains continue to show up for the Midwest in the week #2 outlook, but that’s where they stay. The Bermuda High continues to be displaced in the northeastern Atlantic, which keeps it out of position to transport moisture up into the Midwest. Correspondingly, we need to move the Hudson Bay high out to fix this weather pattern for the Midwest. Forecasters continue to think that it will happen, but thus far it has not. High pressure is building over Texas, which is expected to produce ridge-running storms over the top, but they will be too far south to benefit the bulk of the Midwest until the above changes happen. As such, the Midwest remains dry, and we can expect another round of lower crop ratings when they are released on Tuesday (Monday is a holiday). Ironically, the NDVI satellite greenness ratings for the 3-I states of Iowa, Indiana, and Illinois are near the five-year average for this point in June. Crops are hurting in pockets that are the driest and/or where soils are light with little water holding capacity. But the core of the Midwest still does not show significant stress. At some point, forecasters expect this pattern to break down. They do not see it as persistent. When it does break down, rains will occur, and the market will respond accordingly. Until then, traders will be wary of being short. The set-up leaves traders at a point of added risk as we head into the three-day holiday weekend, when the weather models will continue to update every six hours, but the markets will be closed until Monday evening. I have to wonder how comfortable traders who have been riding this market higher with long positions will be going into the three-day weekend with those profits at risk.
