March 14 – Stock futures rebounded overnight, but nerves remain on edge on Wall Street amid the plethora of tariff stories currently unfolding. This week’s data reflected better than expected inflation news, but the focus remains on what the myriad of tariffs will do to economic growth – both here and abroad. Wall Street focused primarily on the positive business implications of reduced taxes and deregulation when Donald Trump won the election in November, but now it’s pricing in the risks of tariffs, which are becoming a bigger factor than it initially anticipated. That means that traders are focused on a lot of “what if” scenarios currently. The VIX remains elevated near 24 as a result, although that’s down from nearly 30 earlier this week. The dollar index is trading lower near 103.7 in early trade as the euro finds new strength this morning. Yields on 10-year Treasuries are trading near 4.32%, while yields on 2-year Treasuries are trading near 3.98%. Crude oil prices are roughly 1% higher in this morning’s trade as cheap prices uncover some buying interest, while the grain and oilseed markets are mixed.
Gold prices topped $3,000 per ounce in early trade today, marking a new record high for the precious metal amid the rising uncertainty brought on by President Trump’s various tariff policies. Uncertainty tends to lead investors to migrate to the hard assets, and gold has been one of the top choices this time around. And that buying interest goes beyond retail customers to central banks as they beef up their reserves. Another desired safe haven is U.S. government securities. That buying increased demand for the debt certificates, driving down Treasury yields as tariff worries mounted. However, Treasury yields are stabilizing again as that buying slows relative to the supply.
One measure of consumer and business confidence in China is the level of loans issued. High levels of confidence tend to result in larger loan volumes for expanding business or increasing purchases, while the opposite is true as well. China’s bank loans rose by 1.01 trillion yuan ($139 billion) in February, down 30.3% from the previous year’s level and down from analyst expectations of 1.28 trillion yuan. Medium and long-term loans were down by more than 58%, reflecting rising fear of future conditions. These are the loans that mainly represent borrowing for housing, which is a poor sign for any recovery in the property market in the near term. On the other hand, government issued bonds rose by 1.7 trillion yuan or 182% as part of the government’s stimulus program. In fact, China’s central bank signaled that even more stimulus via bonds and reduced interest rates can be expected going forward as the government tries to counter Trump’s tariffs against it.
China’s low birth rate continues to be a significant long-term structural challenge for its economic growth goals. More local governments announced new policies designed to stimulate a higher birth rate following this month’s Two Session’s policy meetings by the central government. Hohhot is one such city. It introduced a cash incentive of up to 100,000 yuan ($13,815) to encourage families to have a third child. However, it is not believed that subsidies alone will be enough to change the culture created by many years of a one-child policy in China.
The various tariff battles initiated by the Trump Administration have had just marginal impact on grain and oilseed exports to this point, but it’s a futures market, and futures prices are pricing in potential scenarios. That has pulled prices down to levels that are attractive to end users, which brings periodic strength to the market, but the risks to trade remain elevated enough that few buyers have the incentive to chase the market at this point. The exception to watch will be the wheat market, followed by corn, as both have some weather risks and relatively snug supplies among major exporters. Hot dry conditions with high winds are stressing the winter wheat crop in the Southern Plains this week, while it’s becoming increasingly important that we see rains increase soon in Russia’s winter wheat belt as well amid unseasonably warm temperatures in the region.
Many of the questions that I field focus on U.S. soybean sales and shipments to China, which still has a little over a million metric tons of unshipped U.S. soybeans on the books. I wouldn’t be surprised if we see a few cargoes cancelled by China to send a message, but I otherwise don’t expect to see much change here. Most of the soybeans still on the books are believed to be Sinograin purchases for China’s reserve. Sinograin is a state-backed company, so in essence, the government would be paying itself the tariff on the shipment. It’s the purchases by crushers that we’d need to worry about, and they wouldn’t be expected to buy much anyway until cheaper supplies out of South America have been fully utilized – probably six months from now. History tells me that China will pay whatever it needs to pay to meet its needs at that point, but it also has considerable reserves that it can rely on as well. As such, the primary Ag commodities to be hurt by the trade war in the immediate future look to be pork and beef flowing from the United States to China. That said, it will be essential to see an agreement with Mexico soon.
