May 27 – Stock futures rallied overnight as traders come back from a three-day holiday weekend. The optimism has roots in President Trump’s pullback of his threat to implement a 50% tariff on the European Union on June 1, reverting back to the end of the original 90-day pause, which would be July 9. That gives us a bit more certainty over the next few weeks, allowing stocks to rally to start the week. The VIX slipped back lower again to trade near 21 this morning, after popping above 25 on Friday. The dollar index is trading near 99.2. Yields on 10-year Treasuries are trading near 4.48%, while yields on 2-year Treasuries are trading near 3.98%. Crude oil prices are nearly 1% lower this morning as they trade near $61 per barrel. The grain markets were mostly lower, while the soybean market was firmer once again this morning, led by soyoil, as traders anticipate a decision soon on biofuels.
Durable goods fell 6.3% on the month in April as President Trump implemented his reciprocal tariffs on nations around the world. That compares to 7.6% growth in March as many buyers stocked up on goods ahead of the tariffs. Analysts had expected a contraction of 8.1% in April, so the numbers weren’t quite as bad as expected, although they certainly were not good either. Much of that was due to high priced transportation orders. Durable goods orders minus transportation rose 0.2%, after being down 0.2% in March. That was better than analyst expectations of a 0.2% decline. However, core capital goods orders are seen as an indication of business sentiment. Core capital goods orders fell 1.3% in April, after rising 0.3% in March. Analysts had expected a 0.2% decline, so the obviously came in worse than anticipated.
Much of China’s economic growth has come on the back of Foreign Direct Investment. That’s foreign money invested directly into China’s economy, including investment in its stock market. FDI in China fell by 11.9% year-on-year in April, after bouncing 13.2% in March. Nonetheless, FDI year to date is still down 10.9% from the previous year, after being down 27.1% a year ago. This continues a trend seen over the last several years as China increasingly struggles to keep the flow of foreign money coming into its economy to sustain it, leading China to have to go deeper into debt to sustain the economy through government spending.
Electric vehicles is one of the sectors that Chinese authorities have chosen to target as a growth sector upon which to build their economy. The biggest electric vehicle maker in China is BYD, which just announced an aggressive price cut plan. It will focus on 22 low-priced models priced at under 150,000 yuan ($20,820). BYD is offering discounts of 10 – 30% on its cards, putting its cheapest model at 55,800 yuan ($7,750). This is expected to trigger another round of price wars in China, which is expected to also spread to China’s export of NEVs overseas. The price cuts are illustrative of China’s overcapacity in electric vehicle production, which it then dumps onto the overseas market. That in turn has triggered massive tariff hikes by other countries to restrict the flow of these low-cost cars into their markets. The above-mentioned start to another price war is expected to trigger another round of trade tensions in a time when those trade tensions are already high.
I’ve previously mentioned that China is subsidizing a railway from Mato Grosso in Brazil to Peru’s Chancay port on the Pacific. China’s COFCO has a 60% stake in that port. However, the project is larger than that. The overall project, of which the above rail is a part, is called the Brazil-Peru Bioceanic Corridor, creating a railway that connects the Chancay port to Ilheus, Brazil on the Atlantic coast. The transcontinental railway would prove quite strategic for China, cutting 10 days off transportation time for shipping corn, soybeans, and iron ore from Brazil to China, while also reducing costs for doing so. It’s another investment that China is making to diversify away from dependence on the United States for essential commodities.
USDA is expected to release its weekly crop progress and conditions report this afternoon, after being closed for the Memorial Day holiday yesterday. The report is expected to show that both the corn and soybean crops are being planted in a very timely way, with most of the Midwest enjoying improved moisture as well. It will likely show some planting delays continuing for areas of the southern and eastern Midwest. However, the market doesn’t expect that to be a significant factor when much of the remainder of the Midwest sees a nearly ideal start to the growing season. We still face risks of dryness stressing early seedling growth in the central part of the Midwest over the coming week to 10 days, focused on northern Illinois, northwestern Indiana, parts of Missouri and Iowa. The focus is expected to shift more to longer-range weather patterns as we turn the calendar to June next week. Forecasters still speak of elevated risks of a hot dry growing season for central and western portions of the Midwest this summer. Forecasts in June should provide some insight into whether that is a pattern that will be developing.
