Perspective: Morning Commentary for March 29

By: Arlan Suderman, Chief Commodities Economist

Wed, 29 Mar 2023, 13:43

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

March 29 – Money quietly flowed into the commodity and equity sectors overnight as bank contagion fears gradually ease for now, and traders become comfortable with expectations that the Federal Reserve is very close to a pivot in monetary policy, despite what it says. The VIX traded near 19 for the first time in 20 days overnight, reflecting the easing worries on Wall Street, even as Treasury yields continue to trend higher. The dollar index firmed to trade near 102.7 this morning, although it remains in a longer-term down-trend. Yields on 10-year Treasuries are trading near 3.59%, while yields on 2-year Treasuries are trading near 4.11%. Crude oil prices are 1% higher at two-week highs, while the grain and oilseed sector continued its recent rally overnight as well.

Cheap prices create demand, and cheap interest rates create demand as well. Treasury yields plummeted earlier this month when Silicon Valley Bank and Signature Bank both failed amid worries of contagion that threatened the economy. Some of that decline was due to expectations that the Federal Reserve would “have to” pivot its monetary policy, while some of it was a rush to safety in the Treasury market – demand for government-backed securities results in lower yields. But those lower yields had their desired effect. U.S. residential mortgage refinancing activity hit a six-month high last week amid the lower rates, making it easier for consumers to service their loans in this current economic environment. In fact, home loan applications rose for the fourth week in a row last week, which is the longest streak in four years. The most recent week saw a 2.9% increase in loan applications, with a 4.8% rise in refinance applications and a 2% rise in new purchase applications. This is part of the process of the economy adjusting to higher interest rates. New home purchases tend to hinge most on consumer confidence in the economy, at whatever interest rate. Rates were so low for so long, many thought that we would never sell homes at rates above 4 or 5%, but we’ve frequently done so throughout our history. I recall being thrilled that I was able to get a mortgage rate as low as 10% in the early ‘90s. This most recent trend suggests that a) consumers are adjusting to a higher rate environment, and b) they still have enough confidence in the economy to make new home purchases, although the overall health of the housing industry remains lacking.

Chinese ports are increasingly congested with empty containers as orders for consumer goods decline. Some of that is due to the current economic weakness in Europe and in the United States, but much of it comes from resourcing of products outside of China following three years of Covid-related restrictions and supply chain problems, as well as rising tensions between China and the West. A significant number of companies pulled investments out of China over the past several years as countries seek more diversified sources for products, including bringing the production of the most essential products back home. Even some China-based companies are setting up joint ventures in other countries to chase some of this demand, while also reducing their risks of sanctions against Chinese products as tensions with the West increase. This overall trend is expected to weaken China’s role as the world’s global manufacturing center, while also making trade protectionism threats less effective.

This creates challenges for China’s economic recovery. As such, it’s strengthening its efforts to expand its Belt and Road Initiative across Asia, Africa, Europe, and South America. This investment in infrastructure projects increases demand for Chinese-made construction equipment, creating demand for manufactured products back home. However, it’s also estimated that China ended up bailing out 22 developing countries between 2008 and 2021 at a cost of $240 billion, making these countries further obligated to China. Observers expect China to continue to push these projects that create political and economic ties with the host country while also creating demand for Chinese manufacturing. The expansion of BRI projects is expected to increase demand for Chinese construction equipment by up to 70 – 80% in the first quarter of the year, but it goes both ways. A recent agreement has Saudi Aramco working with its Chinese partners to build a $10 billion refining and petrochemical facility in China that is expected to increase the long-term commitment of China to buy crude oil from Saudi Arabia, while further connecting those two countries politically and economically. The facility is expected to begin operations in 2026.

Wheat prices surged again overnight on reports that Cargill will not be an exporter of grain from Russia in the 2023-24 marketing year. Foreign companies have come under increasing pressure within Russia, and they are slowly exiting the country. Russian exporters say that the grain will still move, whether its handled by a foreign or local company. But fund managers holding large short positions are nervous, especially amid signs that Russian exporters may be refusing to accept tenders below $275 per metric ton, and some say that floor is rising to $285 - $290 per ton. It just creates more uncertainty around the wheat market, putting more focus on problems in the U.S. Plains, as well as the expected start of El Nino that increases risks for Australia. Furthermore, China bought more corn overnight, again. Suddenly, the shorts are very uncomfortable in the commodity sector – especially the grain and oilseeds.

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