May 19 – Stocks came under modest pressure overnight following a downgrade of U.S. sovereign credit. Yet, the markets are thus far taking the move in stride. The VIX is trading near 20 this morning as a result of the downgrade, while the dollar index slipped lower to trade near 100.2. Yields on 10-year Treasuries rallied to a five-week high near 4.56%, although they’ve slipped a couple of points since then, while yields on 2-year Treasuries are trading near 4.01$. Crude oil prices are modestly weaker, while the grain and oilseed markets were modestly higher overnight.
Moody’s cut its U.S. sovereign debt rating one notch over the weekend – dropping it to Aa1 from the gold standard AAA. Yet, Moody’s also stated that the United States “retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the U.S. dollar as a global reserve currency. In essence, Moody’s is merely catching up to the other two major credit agencies. Standard and Poor’s downgraded the U.S. debt in 2011, and Fitch Ratings did so in 2023. Yet, the timing of Moody’s action was not missed – doing so as Congress debates its “big beautiful bill” to fund the government. The fact is, neither party of elected officials has shown the political courage to do what is necessary to solve our nation’s debt problems, and those problems are growing at an exponential pace now that interest payments on that debt top $1 trillion per year. Republicans in Congress hope that the Department of Government Efficiency led by Elon Musk can do the job of balancing the budget to save them the political risk of doing so, but DOGE can’t do enough on its own without the help of Congress. That leaves us at risk of more credit downgrades in the years ahead, that would be expected to lead to even higher interest rates. The high level of our national debt is one reason why 10-year Treasury yields have been so strong over the past six to eight months – at a time when the Fed was cutting its benchmark rate.
It’s been eight days since an agreement was reached with China to pause the tariff war between the two nations for 90 days. The broader markets celebrated the agreement, with the equities surging higher. It most certainly is positive when the two sides talk, and it appears that both China and the United States have negotiators in place who know how to build relationship in the negotiation process. That raises some hope for the future of the talks, but this is far from over. The differences between China’s position and that of the Trump Administration are far apart yet. It took 13 face-to-face meetings to reach the Phase One trade agreement during Trump 1.0. It may not take 13 face-to-face meetings this time, but that doesn’t mean that we should expect a quick solution. We can hope so, but we need to be prepared for more of a prolonged process. In fact, that’s exactly what China’s state media has been doing – preparing its readers for a prolonged negotiation process.
The agreement reached eight days ago rolled back the U.S. reciprocal tariffs to their 10% baseline, while still adding on the additional 20% tied to stopping the flow of fentanyl from China into the States. As such, China rolled back its retaliatory tariff rate to match the 10% level currently held by the United States. But that does not mean that China’s overall tariffs are now down to 10%. They’re merely rolled back to what they previously had in place, plus the 10%. As such, the overall tariff on imported U.S. soybeans is now at 23%, while the same rate applies to grain sorghum imports as well. The total tariff currently in place for U.S. pork and beef entering China is 32%, although we’re still waiting on China to renew its approval of U.S. export facilities for beef. The tariff on U.S. cotton imported into China is 26%. China has import quotas for corn and wheat. U.S. corn imports within the quotas are currently 26%, which is true for wheat as well. However, U.S. corn and wheat imported above the quota faces a tariff of 90%.
This is in addition to the numerous non-tariff trade restrictions implemented by China over the years. China placed anti-dumping duties on U.S. dried distillers grains and solubles of 33.8% in 2016, which were increased to 42.2% to 53.7% in January 2017, on top of “anti-subsidy tariffs” ranging from 11.2% to 12%. That brings the total to nearly 66% - effectively embargoing U.S. DDGS imports since 2017. China took similar action to the above to stop the flow of 1.1 billion gallons of U.S. ethanol into the country back in 2016, coinciding with the stoppage of 6.5 mmt of DDGS shipments. The above tariffs to block entry of U.S. ethanol and DDGS into China were extended another five years two years ago during the Biden Administration. Yet, China recently signed an agreement to import Brazilian DDGS. Now Brazil looks to get that business that the U.S. industry developed a decade ago.
The grains bounced overnight, but that’s all that I’m going to call it for now. Most notable is the stabilization of soyoil prices as the market starts to realize that the rumored 4.65-billion-gallon biomass diesel production estimate may be a disappointment, but it’s still a strong number, if in fact that is what the EPA is backing. Dry areas of Nebraska got some rain over the weekend, while the southeastern Midwest continues to battle planting delays.
