May 21 – Stock futures again had a weaker tone overnight, but they continue to consolidate just below their recent highs as investors assess the impacts of President Trump’s tariff war in a week when hard economic data is lacking. Earnings reports continue to be the focus, with some retailers reducing their outlook, while others show resiliency. The VIX is trading just below 19 this morning, while the dollar index eased back to trade at two-week lows near 99.7. Yields on 10-year Treasuries are trading near 4.53%, while yields on 2-year Treasuries are trading near 4.00%. Crude oil prices probed levels above $64 per barrel overnight, before easing back below $63 by this morning. The grain and oilseed sector continues to show some resiliency this week, led by fund short covering and end user bargain buying in wheat amid sinking crop ratings, while soybeans find support from expectations that we could hear favorable news on the biofuel front soon.
Crude oil prices probed the upper end of its recent trading range overnight following unconfirmed news reports that an Israeli attack on Iran’s nuclear facilities might be imminent. Obviously, neither side would confirm or deny the reports, and prices eventually settled back into their recent trading range once again. But the overnight action reflected lingering fears that we could see a broader Middle East conflict arise once again that could put the world’s oil supply at risk, even as questions over demand continue to linger. These markets continue to be vulnerable to headline risk, despite worries over a sluggish global economy. Iran is the third largest producer in the OPEC cartel, but it has also previously warned that it would strike oil infrastructure in other producing nations in the region if it is attacked. The United States appears to be moving toward a new nuclear deal with Iran, although the two sides still remain far apart on some issues, but some in Israel fear that it won’t go far enough in containing Iran’s nuclear capabilities. Meanwhile, some observers believe that Iran may be getting close to nuclear weapon capability.
Various members of the Federal Open Market Committee – the Fed – continue to make public appearances, with their comments eliciting attention from investors on Wall Street. Several FOMC members made comments on Tuesday, indicating that they believe that tariff-related price increases have yet to hit the consumer. They spoke of how retailers stocked up ahead of the reciprocal tariffs, but those inventories are now drawing down. As such, they expect to see the inflationary effects of the tariffs to begin showing up in the hard data over the next couple of months. We will then see how the consumer responds to those higher prices. As such, Cleveland Fed President Beth Hammack stated, “I think the best action we can take is to sit on our hands and really carefully go through the data, engage with our communities, hear what they’re thinking about, hear about the choices that they’re making, and see how that all comes together.” In other words, the Fed doesn’t know any more than anyone else, and they’re waiting for “it” to happen before acting, and they’re not sure what “it” will be in the current environment. They remain afraid to cut rates ahead of knowing if inflation is going to be a problem, and they’re afraid of raising rates to get ahead of the feared inflation, fearing that an increase might hurt employment. That again is why I do not expect the Fed to act until later this year unless we see a dynamic change in the economy – one way or the other.
Meanwhile, U.S. retailers are rushing to restock during the current 90-day tariff pause with China that was announced on May 11, and Chinese manufacturers are doing everything they can to meet that demand. Retailers see this as an opportunity to restock at “acceptable” tariff levels. The tariff suspension window did not return tariffs to previous levels, but rather it lowered them to levels that retailers think they can make it work. As such, they’re doing what they can to restock, but to also stock up again ahead of the Christmas holiday shopping period. We saw this same thing happen earlier this year, when retailers stocked up ahead of the initial reciprocal tariff announcement. Forty-five percent of business that passes through the Port of Los Angeles comes from China. The port saw container volumes rise by 9.5% in April as those initial shipments arrived, but then they dropped by 30% by the first week of May. Container tracking firm Vizion now reports that bookings from China to the United States have nearly quadrupled following the May 11 announced tariff pause, creating a surge in factory activity in China, increased port congestion and rising freight rates. The net effect is to hold off some of the larger inflationary effects of the tariff war here in the States, while providing a near-term injection of economic activity in China. Spot rates for mid-June soared to $9,100 per 40-foot container – nearly four-times higher than the $2,250 rate seen in early May. Unfortunately, many of the ships needed to carry the containers had already been rerouted to European markets.
We continue to see fund short covering and end user buying lift prices in the grain and oilseed complex this week. We don’t really have a fundamental story to justify sustaining a rally in the complex, but we do have enough potential stories to make end users and fund managers holding large short positions nervous at current price levels.
