June 17 – The intensifying battle between Israel and Iran weighed on stock futures overnight after investors saw news reports that President Trump cut his attendance at the G-7 Summit short to return to Washington, D.C. for an emergency meeting of the National Security Council last night. The VIX is trading back above 20 this morning, while the dollar index is trading near 98.2. Yields on 10-year Treasuries are trading near 4.42%, while yields on 2-year Treasuries are trading near 3.96%. Crude oil prices are nearly 2% higher as tensions escalate in the Middle East, while the grain and oilseed markets were mixed to firmer.
Retail sales in May were unimpressive. In fact, retail sales in May fell 0.9% month-on-month, with April numbers revised to a 0.1% decline as well. Analysts expected May retail sales to decline by 0.6%, so they beat those expectations to the downside. Removing auto sales, retail sales fell 0.3% - so not as bad, but still not good. Retail sales for April were adjusted down to flat, versus the 0.1% gains originally reported. Analysts expected retail sales minus autos to grow by 0.2%. Retail sales minus vehicles and gas fell by 0.1% - again, not as bad, but still negative. There’s a lot of ways to look at these numbers. To demonstrate how one can turn the data however one wishes to fit their bias, I looked at May retail sales excluding autos/gas/building materials/food services, which rose 0.4%, up from a 0.1% decline in April. The bottom line is that retail sales were underwhelming in May – a month in which consumer sentiment started to recover from very low levels amid the tariff war. The June data should provide a better measure of things, but we’ll be at the end of the 90-day reciprocal tariff suspension by that time, which will be the greater focus.
So, how are the existing tariffs impacting prices? Import prices were flat in May month-on-month, versus analyst expectations that they would decline by 0.3%. That leaves Import prices up 0.2% year-on-year, up from 0.1% in April. In other words, the May data shows that we are not importing inflation. Some would argue that we still had not seen the pass through of tariff costs yet in May, which is likely true to some extent. Export prices fell by 0.9% month-on-month in May, after rising 0.1% in April. Export prices were up 1.7% year-on-year in May. This suggests that we exported very modest levels of inflation to the rest of the world in May.
The Iran – Israel war is now in its fifth day, and it continues to intensify. French President Emmanuel Macron told reporters at the G-7 Summit that President Trump had offered a ceasefire agreement to both Iran and Israel, but the White House has not confirmed that. Instead, President Trump indicated that we’ll likely see Israel continue to hit Iran hard over the next couple of days, angered by Iran’s targeting of civilian targets. Trump indicated that he is considering sending a Middle East envoy to meet with Iran’s leadership, as he continues to seek a nuclear deal with Iran, but Israel seems dedicated to totally destroying Iran’s nuclear capabilities. Many of Iran’s top military leaders have already been killed by Israel. The markets were chilled by President Trump’s social media post last night indicating that the residents of Tehran should evacuate the city, suggesting that the attacks will intensify from here. Two oil tankers collided and caught fire today in the Strait of Hormuz, through which a fifth of the world’s oil exports flow. It’s thought that the collision may have had something to do with all of the electronic interference tied to the military activity in the region, but the Strait thus far remains open. Iran reports that it has fired 400 ballistic missiles thus far, along with hundreds of drones targeting Israel. Israel reports that 35 missiles have successfully penetrated through its defense shield to make direct hits. Oil and fertilizer production in the region is the primary concern from a commodity standpoint. The vast majority of Iran’s fertilizer production has been taken offline, with the same true for most of Egypt’s production as well due to the shutdown of natural gas output in Iran and Israel. Israel demands that Iran’s nuclear program be dismantled, and Iran thus far refuses to do so – so the war continues.
The Senate released its version of the tax bill late Monday. The 45Z provisions of the tax bill provide the funding mechanism for the U.S. biofuel program. We now know that both the House and Senate version of the 45Z provisions provide funding for seven years through 2031. Both also remove the Indirect Land Use penalty for U.S. feedstocks, which previously punished our biofuel feedstocks for “forcing” Brazil to destroy more rainforest. The House version limits feedstock credits to those originating in the U.S., Canada, and Mexico, while the Senate simply gives 80% of the credit value for foreign feedstocks. The House version continues to give a maximum credit of $1.75 per gallon for sustainable aviation fuel, while the Senate version cuts the credit off at $1.00. There are a few other differences as well, but these are the significant ones that they must work through. I still see the removal of the indirect land use penalty as one of the most significant, which could help ethanol qualify as a feedstock for sustainable aviation fuel, while aiding soyoil as well.
