June 4 – Both stocks and commodities are again under pressure this morning as Wall Street traders fret about the risk of a sluggish, or stagnated, economy. The VIX is trading near 14 at this hour, while the dollar index is trading near 104.3 after posting a fresh eight-week low. Yields on 10-year Treasuries are trading near 4.35%, while yields on 2-year Treasuries are trading near 4.79%. Crude oil prices are trading near $73 per barrel at roughly four-month lows on fears of rising supplies amid a stagnated economy. Prices plummeted to new lows for the move on Monday following a disappointing OPEC+ meeting that saw the production base raised for the United Arab Emirates by 300,000 barrels per day, while the cartel also talked of phasing out the cuts late this year into next year rather than sustaining them. The grain and oilseed markets are also under pressure from the current thinking that the economy is stagnating, reducing demand.
USDA provided little fodder for the Ag commodity bears when it released its weekly crop progress report on Monday afternoon. The agency pegged this year’s corn crop planting progress at 91%, which is 2 points above the five-year average for this week of the year. That average is dragged lower by a dismal 67% planting progress at this point in 2019, but it still tells traders that progress is being made. The first condition ratings of the 2024-25 growing season put the crop at 75% Good to Excellent, which was 4 points above the five-year average and 5 points above the average trade guess. Ironically, the lowest ratings – all above 60% G/E – were all in the southern belt. The weekly crop ratings are more or less a beauty contest of subjective ratings on how the crop “looks” to the observer. You can argue whether they’re legitimate or not, but the bottom line is that observers did not “see” any substantial problems with the crop over the past week. Problems with the crop appear to be rather local and not widespread. Soybean planting progress at 78% was 5 points above the five-year average, with few real problem areas showing up at this point. The first soybean condition ratings for this crop should be released next week. Spring wheat planting progress at 94% was also 4 points ahead of the five-year average, and winter wheat ratings ticked higher as well. There’s a long growing season ahead, and certainly problems could emerge along the way. But it’s difficult to sustain a rally in June without a story, especially when the funds have already unwound their previously large short positions.
The aforementioned short-covering rally occurred earlier this spring for the grain and oilseed complex, while it began in December for the crude oil market. That ended a long stretch of “commodity deflation” for the sector that began back when the Federal Reserve started raising interest rates in March 2022. The macro thinking behind commodity deflation was that the Fed was going to bring inflation down by putting the brakes on the economy, resulting in less demand for the commodities. Reinflation expectations started to emerge when the Fed sentiment flipped last December, with fund managers eventually deciding that it was not in their best interest to maintain large short positions in a reinflation environment. However, we’ve seen a major retracement of the resulting rally over the past several weeks as the reinflation mantra has eased – partially due to re-emerging talk from some Fed members about possible rate hikes, but certainly reduced talk of rate cuts. It’s part of the ebb and flow of the market.
Lost in this is the ongoing fiscal spending that continues to expand our nation debt, even as it stimulates the economy, increasing the volume of debt certificates being offered to the market, and providing underlying support to the mid- and longer-term end of the yield curve. Yields on 10-year Treasuries are testing the 200-day moving average, which is near 4.35%. Yields have struggled to sustain a move below the 200-day moving average this spring, although this week’s action appears poised to test that once again. The national debt is currently at $34.8 trillion, with the annual interest payments on that debt now over $860 billion per year and rising. That total is rapidly approaching the $895 billion that we spend annually on defense and war efforts. While also approaching the $1.4 trillion that we currently spend on social security each year. Four years ago today our national debt stood at $28.2 trillion, with annual interest payments of $352 billion. The national debt will stand at $47 trillion four years from today if we maintain our current path, with annual interest expenses of $2.86 trillion, according to USdebtclock.org. Our next possible inflection point for this issue could very well be in November and December of this year when a lame duck Congress – and possibly a lame duck president – must reach a deal on the national debt ceiling prior to January 1st. The debt ceiling is suspended until that date. History tells us that they’ll likely keep kicking the can down the road and suspend it for longer, but that also raises the risk that we’ll see a downgrade of our credit rating, further boosting interest rates. I still see the thought that we will return to the interest rate environment of the past 15 years prior to the pandemic as more of fantasy thinking, with the more likely scenario being a return to what we saw through much of the 1990s and early 2000s.
