June 6 – Europe cut interest rates for the first time in five years today, but Wall Street was cautious in overnight trade while waiting for the May jobs numbers, as well as next week’s Federal Reserve meeting. Yet, money flow was generally positive for the commodity sector overnight in what has generally been a rough week for the hard assets. The VIX is trading below 13 this morning, while the dollar index is trading near 104.3. Yields on 10-year Treasuries are trading near 4.31%, while yields on 2-year Treasuries are trading near 4.74%. Crude oil prices are modestly higher, as they bounce from this week’s four-month lows, while the grain and oilseed markets were all modestly higher overnight as well.
First-time claims for unemployment benefits rose to 229K in the week ending June 1, up from 221K the previous week, and above analyst expectations of 216K claims. Yet, the four-week moving average slipped to 222.25K, down from 223K the previous week. Continuing claims for the week ending May 25 rose by 2,000 to 1.792 million, which is still a low number. The four-week moving average for continuing claims rose 2,750 to 1.789 million. These numbers continue to reflect a tight jobs market, although not quite as tight as it once was. Other data released this morning revealed that non-farm productivity grew at a sluggish 0.2% annualized rate in the first quarter, which is down slightly from the originally reported 0.3% rate, but it also was widely expected. Unit labor costs came in at an annualized rate of 4.0% growth, which was down notably from expectations that it would remain at the originally reported 4.7% rate. This suggests that wage inflation remained a problem in the first quarter of this year – just not quite the size of problem first believed.
China’s property sector has something to celebrate. Recent government rescue packages appear to be having an impact, at least for now. CRIC’s recent survey showed that property transactions increased significantly in some sectors of China, based on a rise in its housing market index. The index rose 18.5 points to 86.1 in the week ending June 2 for first-tier cities within China. The index rose just 2.1 points to 57.8 for second-tier cities, but it rose 18.8 points to 113.3 in third-tier cities that tend to be more rural. This is much needed positive news for China. However, car sales are struggling in China, and that is a heavily subsidized sector. Chinese passenger car sales totaled 1.685 million in May, down 3% year-on-year despite recent subsidies. Electric vehicle sales continue to rise, reaching roughly 50% of market share for passenger vehicles sold in China due to these subsidies. The May sales data reflects the second consecutive month of declining car sales, suggesting that consumer confidence remains soft.
Crude oil prices plummeted to start the week after OPEC+ disappointed the market by raising its base output rate for the United Arab Emirates by 300,000 barrels per day, and then failing to commit to sustaining existing reduction levels into next year, saying that they would begin scaling back output reductions to unwind 2.2 million barrels per day in cuts in the 12 months beginning in October of this year. The resulting sharp price decline caught the attention of OPEC+ ministers, who are now backpedaling their comments to provide support for the market. OPEC+ officials attending an economic forum in St. Petersburg suggested that they could “tweak” their plan if necessary to provide support for the market. Russia desperately needs the oil revenue to support its war effort, and most OPEC+ members have economies that are heavily dependent on oil revenue. They’ve reduced output to support higher prices to generate more overall revenue, but that has also expanded production among non-OPEC+ producers, reducing the market share of the cartel.
Soymeal futures rallied Wednesday around a little-reported tax development in Brazil. Brazil’s Finance Ministry indicated earlier this week that it would tighten rules for using tax credits from the federal PIS-Cofins taxes – essentially closing a loophole that benefited industries, as it put it. The edited executive order will impact many corporations across Brazil, with some of them deeply engaged in agricultural commodities. The Brazil government says that it isn’t raising tax rates, but the move is expected to generate another 29.2 billion reais ($5.54 billion) in tax revenue annually as the administration seeks to offset 26.3 billion reais of tax exemptions recently granted by Congress. The new executive order takes place immediately, although it needs approval from Congress within the next four months to remain valid. It essentially increases the tax burden on Brazil corporations. That means that soybean processors and biofuel producers will essentially have higher tax costs, reducing margins. That loss of revenue is expected to shift some crush and biofuel activity to Argentina and to the United States, although the scope of that shift is not yet known. Exporters would also be impacted by this tax code change, but the weak Brazilian currency already gives them an advantage. Furthermore, a reduction of demand from crushers and biofuel processors would be expected to weaken basis, keeping Brazilian beans competitive longer on the export market.
