June 5 – Job numbers will be the focus much of the remainder of this week on Wall Street, although we’ll also get data on productivity tomorrow. We received job numbers from the private sector this morning, which will be followed by the government’s monthly jobs report on Friday, providing additional guidance for what traders believe will be the future direction of monetary policy from the Federal Reserve next week. The VIX is trading near 13 this morning, while the dollar index is trading near 104.2. Yields on 10-year Treasuries are trading near 4.32%, while yields on 2-year Treasuries are trading near 4.77%. Both are either at, or near, significant areas of chart support currently, making this week’s action pivotal for assessing current market sentiment. Crude oil prices are modestly higher this morning, bouncing following several days of sharp losses that drove prices to four-month lows. The grain and oilseed sector is mixed to firmer this morning, as prices consolidate following recent sharp losses.
It’s largely been a week of managed money shorting the commodity complex once again as worries about the domestic and global economy raise demand concerns for the sector ahead of next week’s Federal Reserve meeting. This week’s data has thus far suggested that the economy is slowing, reducing demand for commodities. But that also has again revived hopes that the Federal Reserve will pull rate cuts back onto the table when it meets next week, which Wall Street would celebrate. Fed fund futures trading this week increased the odds of a September rate hike to 67%, up from 48% a week ago. I would agree that the data shows a stagnating economy, but it has thus far not shown the progress that we need to see in bringing inflation down to the 2% mandate, based on the metrics given to us by the Fed. That leaves us with a stagnant economy with lingering inflation pressures heading into this summer of the election campaign in which we can anticipate continued fiscal stimulus working against the Fed’s efforts.
The private sector created 152K jobs in May, according to today’s ADP report, falling short of analyst expectations of 173K jobs. The April number was revised lower to 188K jobs created, down from the 192K originally reported. Unfortunately, the correlation between the ADP numbers and the governments more comprehensive report have not been as strong as we’d like, although they were relatively close last month. Analysts currently expect Friday’s monthly jobs report to show that 195K non-farm jobs were created in May, up 20K from the previous month’s total, with the unemployment rate remaining unchanged at 3.9%. Perhaps garnering more attention will be the average hourly earnings, which provide a measure of wage inflation trends. Hourly earnings are expected to rise by 0.3% month-on-month for May, up from 0.2% in April, while holding steady at 3.9% year-on-year growth.
The European Union Commission is expected to levy provisional duties on imported Chinese electric vehicles starting on July 4th, according to comments from EU officials. The levy rate is not yet known, but it is expected to exceed 50%, which would be a blow to the Chinese auto industry, which also faces massive import tariffs in the United States, reflecting the ongoing escalation of geopolitical tensions between China and the West. Today’s Caixin PMI index reflected the fastest growth in 10 months in May, rising to 54 for the month, up from 52.5 in April and above expectations of 52.6. This follows a bullish manufacturing PMI a couple of days ago. Analysts believe that the rising numbers reflect a rush to get products delivered on the export market before new US tariffs take effect on August 1st. This suggests that the current upside momentum will be short-lived, leading to export businesses struggling again later this year, along with escalated tensions between China and its major customers in the West. China continues to expand trade with members of its Belt and Road Initiative, but that gained trade cannot offset what it has lost in trade with the West.
Private consultancy SovEcon cut its estimate for the Russian wheat crop to 80.7 million metric tons today, down from 82.1 mmt previously, and down from its March forecast of 94 mmt. The reduction is based on damage done by late spring freezes, but more significantly, by ongoing heat and dryness as the wheat crop moves through its critical reproductive phase. Commodity Weather Group expects stress to continue through the next week in Southern Russia with temperatures in the mid- to upper-90s°F, with that heat spreading into dry areas of eastern Ukraine next week as well. This week’s showers remained confined largely to northern areas of Russia’s wheat belt, as well as northwestern areas of Ukraine, where stress has been less prevalent. We also need to keep our eyes on the sluggish spring wheat planting progress in areas of Russia that have been persistently wet, along with monitoring whether this hot dry pattern lingers long enough to result in a short corn crop in the region, especially in Ukraine, which is the world’s fourth largest exporter of corn. That’s not a story yet at this time, but it is something that we will be watching going forward.
