June 7 – Good news is once again bad news for Wall Street, as a hotter than expected monthly jobs report turns stock futures lower on fears that it will delay a Federal Reserve rate cut. Yes, Wall Street continues to cheer for bad news about the U.S. economy, and it didn’t get it today, resulting in lower stock values. Yet, those stocks continue to trade near recent record highs in many cases, with the VIX trading below 13 this morning and the dollar index trading near 104.7 as it followed Treasury yields higher. Yields on 10-year Treasuries are trading near 4.40%, while yields on 2-year Treasuries are trading near 4.84%. Crude oil prices initially turned lower following the release of this morning’s jobs numbers, while grain and oilseed prices briefly added to their losses as the dollar surged.
The economy created 272K jobs in May, up from analyst expectations of 182K. The April number was revised lower to 165K jobs created, down from the 175K originally reported. The unemployment rate firmed to 4.0%, up from expectations that it would remain flat at 3.9%. Private payrolls grew by 229K in May, while government added 43K new positions. Healthcare added 68K jobs in May, which is close to its 12-month average of 64K jobs added per month, while leisure and hospitality added another 42K jobs and retail added 13K jobs and manufacturing added 8K. The job participation rate slipped to 62.5% in May, down from 62.7% previously as more people dropped from the job market. Perhaps more significantly, average hourly earnings rose 0.4% month-on-month in May, up from 0.2% in April. That put average hourly earnings up 4.1% year-on-year in May, up from an upwardly revised 4.0% the previous month, with the average workweek remaining unchanged at 34.3 hours. The pace of wage inflation indicated by this report will be concerning to members of the Fed when they meet next week. Fed fund futures saw the odds of a September rate cut fall from 69% yesterday to 54% following the data release.
Chinese exports rose at their fastest pace in four months in May as exporters rushed to move products prior to the implementation of new U.S. import tariffs. Exports were up 7.6% year-on-year in May, after rising 1.5% in April. But shipments to the Association of Southeast Asian Nations were also higher, rising by 22.5% year-on-year during the month as China focuses on alternative markets as geopolitical tensions continue to rise with the West. Shipments to the United States rose 3.6% year-on-year ahead of the new tariffs, while shipments to the European Union fell by nearly 1%, after being down by more than 3.5% in April. Ironically, export shipments to Russia also declined 2% year-on-year in May, which is the third month in a row for a decline.
\European wheat futures led the way down overnight after Turkey halted wheat imports from June 21 until at least October 15 to protect its domestic market. Turkish farmers are currently harvesting a big wheat crop, and imports would further aggravate cheap cash wheat prices as the harvest comes to town. Turkey was expected to import 8.5 million metric tons (312 million bushels) of wheat this year, mainly from Russia. Loss of Turkey as a customer comes as Russian farmers are preparing to harvest their own crop as well. The size of the crop however remains in question due to a spring drought and a series of spring freezes for the winter wheat crop, and persistent rains that have delayed planting of the spring wheat crop. This spring’s rally in world wheat prices largely focused on supply concerns focused on the Black Sea Region, but today’s announcement from Turkey focuses the market more on demand concerns. The world cash wheat market is struggling from a softening of demand after the wheat / corn spread priced wheat out of many feed markets. USDA forecasts world wheat consumption in the coming year at 802 mmt, up just 2 mmt from the previous year and the smallest year-on-year increase in six years. The Russian weather story still matters, but not to the same extent as it would have if corn also had a story to keep prices elevated. For today, the focus is on soft demand.
Crude oil, corn, soybeans, and now wheat have all seen their 2024 short-covering rallies now retraced by more than 50% - in some cases by much more than 50%. The reinflation story provided the impetus, along with some geopolitical risks, for fund managers to unwind massive short positions. But as I reported months ago, these commodities also lacked a solid fundamental story to justify the funds building and maintaining a long position. That may come, but such a case is not yet there. I continue to believe that long-term we still will be battling reinflation problems, with this morning’s jobs report and the longer-term fiscal spending issues being a part of that story. But that story will ebb and flow over time while trending in the direction that we anticipate, and this is evidence of such. We are still managing supply and demand at higher price levels than we would have with the same fundamentals a year ago due to the changing inflation dynamics, as expected. But you have to couple that with tighter supply and demand fundamentals to sustain a longer-term fundamental bull market story, and we’re not there yet at this time. For now, it’s about managing these dynamics in a developing reinflation environment.
