May 24 – Stock futures traded cautiously higher this morning, despite hot durable goods orders data, as traders position for a three-day holiday weekend. The markets will be closed on Monday for the Memorial Day holiday. The VIX continues to trade below 13 this morning, while the dollar index is trading near 104.8. Yields on 10-year Treasuries are trading near 4.49%, while yields on 2-year Treasuries are trading near 4.95%, pressing closer to that pivotal 5% level once again. Crude oil prices are modestly higher at this hour, while the grain and oilseed sector is mixed to higher as well.
Durable goods orders rose 0.7% month-on-month in April, perhaps partially explaining yesterday’s hot PMI scores that rallied Treasury yields. That compared to analyst expectations that they would contract by 0.5% during the month. But part of the reason for the surprisingly strong number for April was a sharp downward revision for March. The March number had originally been reported at 2.6% gains, but it was revised to “just” 0.8% month-on-month gains. April durable goods orders minus transportation rose 0.4% month-on-month, exceeding analyst estimates of 0.2%, and above the flat reading for March. Core capital goods orders, which are seen as a measure of business confidence, rose 0.3% month-on-month in April, up from analyst expectations of 0.1%, and up from -0.1% in March.
There was a lot to digest in this report, with all of the revisions of the previous month, but generally the data was seen as supportive of interest rates staying “higher for longer.” There’s a theme starting to emerge in economic circles that we may be returning to the “normal” interest rates of the ‘90s and early 2000s, and that I tend to agree with that. However, that also means that there are many in our economy for whom that will create stress. Think about the fact that millennials have only known near-zero interest rates since they started their vocational careers, and there are many businesses started over the past 15 years who are in the same boat. This also means an adjustment for the consumer in their perspective, as well as their budget, as well.
China’s military conducted drills around Taiwan for the second consecutive day today, testing its ability to “seize power” and to gain control of critical areas of the island nation. China state media reported that its military staged mock missile strikes, while dispatching fighter jets carrying live missiles to perform coordinated mock attacks along with naval vessels. China’s defense ministry stated that the military exercises were necessary to combat Taiwan’s push for independence and to deter external (read United States) interference. Taiwan’s new president has framed his words this week to reflect the belief that Taiwan doesn’t need to declare its independence, because it has already been operating as an independent nation. That infuriates China’s leadership, which believes that Taiwan belongs to it. Meanwhile, people on the streets of Taipei are going about their lives as if nothing has changed. Taiwan’s media is reporting on the Chinese military exercises, but they’re more focused on other news. The people of Taiwan have become numb to China’s threats, but again, perhaps that’s also part of the strategy. Our sources inside of Ukraine were telling us in mid-February 2022 that Russia would not invade, even though it had amassed its troops on Ukraine’s border. They merely saw it as an intimidation factor, once again.
Foreign direct investment (FDI) into China fell by 28% year-on-year in the first four months of the year, representing a record decline for the period. Roughly 13% of the total FDI went into high tech manufacturing industries, while FDI in accommodation and catering jumped by 65%. FDI from Spain and Germany rose by 263% and 35% respectively in the first four months of the year. April FDI totaled $8.1 billion, down from $12 billion in March, the lowest monthly total since November and down 36% from last year’s April total, and the second lowest monthly total since late 2019. What we’re seeing is the dependency of China’s economy on foreign investment, and how much that economy hurts when that foreign investment slows. China is actively working to shift that dependency away from FDI coming from the West toward nations who are a part of their Belt and Road Initiative, but many of those countries do not have a lot to invest.
The grain and oilseed sector continues to benefit from supportive money flow undercurrents as we head into a three-day holiday weekend. Southern Brazil is expected to finally see relief from heavy rains after the next day or two so that a better assessment of soybean losses can be made. In the Black Sea Region, Commodity Weather Group expects dryness stress to spread across Ukraine over the coming couple of weeks, while stress continues for 50% of Russia’s wheat belt. June is the critical month for these areas. The U.S. Midwest should see another brief window of opportunity for planting after the weekend, extending at least until late next week. We should start to see the first condition ratings for the U.S. corn crop over the next couple of weeks.
