June 9 – A nervous caution hangs over Wall Street ahead of the weekend, as traders focus on next week’s Federal Reserve meeting. It’s been a slow week for economic data, allowing optimism to grow on the Street, but now traders are facing the reality of the next Fed meeting that could prove pivotal in more ways than one. Yet, the VIX set fresh three-year lows this week, reflecting the optimistic undercurrent that is developing on Wall Street that traders hope the Fed won’t squash on Wednesday. The VIX is trading below 14 this morning, which is a historically low number. The dollar index is trading near 103.5 in early trade. Yields on 10-year Treasuries are trading near 3.75%, while yields on 2-year Treasuries are trading near 4.57%. Crude oil prices are modestly weaker this morning, while the grain and oilseed sector is mixed ahead of today’s big USDA WASDE crop report.
Fed fund futures trading is placing just 25% odds this morning that we’ll see a rate hike on Wednesday. However, there are 66% odds being priced in this morning that we’ll see a rate hike in the July meeting. The common thinking is that we’ll get a “hawkish pause” from the Fed next week, where the central bank halts its rate hikes for the time being, but then speaks of more rate hikes likely in its released policy statement and in comments made by Fed Chair Jerome Powell in his press conference following the statement’s release. The Fed made it quite clear in recent months that it would rather error on a policy favoring a bias toward higher and longer in its rate policy than pivoting too soon. It doesn’t want to make the same mistake that it made in 1980.That’s the bias that it looks at current data through, and that will likely continue to be the case. I do believe that pressure will increase for the Fed to raise its 2% mandate in the months ahead, but that’s not currently on the table.
The big pivot in the Midwest weather pattern that has been anticipated for the past month is expected to start tomorrow. It’s actually been in the works for the past several weeks as atmospheric signals change, but the payoff of increased rainfall is expected to be felt starting tomorrow in Iowa and working east. Some areas of the Midwest will get good rains, while others will not. Those most likely to benefit from this first round of crop-saving rains are expected to be in Nebraska, southwestern Iowa, Missouri, southern Illinois, southern Indiana, Ohio, and Michigan. South Dakota farmers may get a good drink of rain as well, while North Dakota and Minnesota may be left wanting. Week #2 rains should fill in more of the dry areas. No heat of significance is expected over the next two weeks, although a brief warm-up in the middle of the period is expected. This is a critical time for the corn crop as it starts to set its maximum ear size over the next couple of weeks. As such, it’s critical that the crop’s see moisture stress ease in the days ahead. The area of greatest concern of possibly coming up short in the coming period of seven days stretches from northern Iowa southeast to western Ohio. That takes in a lot of corn area. It’s not expected to be totally dry in this area, but rain totals may be disappointing.
One of the bright spots in the Chinese economy has been auto sales – especially electric vehicles, which the government is pushing despite significant electrical grid issues. Auto sales totaled 1.76 million units in May, up 7.24% month-on-month and 28.6% year-on-year. EV sales made up a third of the total, although the pace of the EV sales is slowing. Consumers took advantage of aggressive incentive programs to buy EVs this winter, but now that push is slowing, with sales momentum expected to wane into the second half of the year. Otherwise, the economic data remains grim elsewhere. The consumer price index edged higher to 0.2% year-on-year in May, but the producer price index was down 4.6% year-on-year in May, after being down 3.6% in April, reflecting more deflationary pressures within China’s economy as demand softens both internally and externally.
USDA announced the sale of 7.2 million bushels of U.S. soybeans to “unknown destinations” for the current marketing year this morning. This provides a boost of confidence at a time needed by this market, as sales have been quite flat for some weeks. The wheat market continues to get support from chatter that China is shopping the North American market, after buying milling wheat from Canada last week. However, today’s primary focus will be on USDA’s WASDE crop report, and whether the agency slashes its corn demand target. It could justify a 100-million-bushel reduction in demand, that would push into a similar increase in ending stocks, which would then pass through into the next marketing year’s supplies as well. I don’t know if USDA will go that far in this report, but that is the eventual expectation, which would bump next year’s ending stocks by a similar amount. Keep in mind that China is expected to feed about 16 million metric tons more wheat in the coming year than in the past, due to this year’s quality problems. That wheat is displacing corn. China currently has corn imports for the coming year 5.5 mmt lower than USDA, with Brazil and Argentina expected to expand production. Keep these demand concerns in mind when considering supply concerns due to dryness across the Midwest. Demand is currently the greater problem.
