May 28 – Post-holiday stock futures traded mixed overnight, with the tech sector finding support from a resurgence in Apple sales in China. However, the primary focus this week is expected to be Friday’s PCE inflation data that the Federal Reserve regards so highly in its monetary policy decisions. The VIX is trading near 12 once again this morning, while the dollar index is trading near 104.4. Yields on 10-year Treasuries are trading near 4.46%, as they again consolidate just below 4.5%, while yields on 2-year Treasuries trade near 4.92%, as they again approach the pivotal 5% level. Crude oil prices are nearly 2% higher on expectations that OPEC+ will maintain its production curbs ahead of the U.S. summer driving season. Grain and oilseed prices are mixed, with wheat leading the way higher for the bulls on more Black Sea production cuts.
Apple smartphone shipments in China were up 52% year-on-year in April, continuing a rebound seen in March. Sales had slumped earlier in the year due to stronger competition from local rivals like Huawei. Industry observers expect to see continued strength in May sales data following an aggressive discounting program implemented by Apple this month. The increased sales are a positive sign for Apple, as well as an indication of consumer willingness to spend money. However, the increased sales are also part of aggressive incentive programs, suggesting that economic activity still needs assistance.
Friday’s U.S. Personal Income and Outlays report is expected to show a slowdown in both personal income and expenditures in April, with little change in inflation numbers, although we may see a slight slowing in core inflation. Wall Street would likely see as good news anything that does not show an increase in inflationary pressures, even if it means that we are not appreciably making progress toward hitting the 2% mandate. We started the year with the market trading expectations of six rate cuts this year, whereas I was doubtful that we would see any, unless the Fed gave us one as it yielded to pressure from Washington. The market is now pricing in expectations for between one and two rate cuts this year, with the first one not coming until September. Even there, the odds are approaching 50-50 that we will see a cut ahead of the November election. Yet, this scenario isn’t much different than what we saw in 2023, when Wall Street traders bounced back from their rate cut disappointments to post record highs, paving the way for the commodity markets to start refocusing on inflation risks in 2024.
Wheat continues to have the most intriguing story, in my view. Local sources suggest that between 1.5 and 2.0 million hectares of crops may have been adversely impacted by spring freezes in Russia, while the greater losses are due to drought stress across much of the region. Russian consultancy SovEcon cut its wheat production estimate to 82.1 million metric tons over the holiday weekend, while IKAR lowered its production estimate to 81.5 mmt. Ukraine’s wheat production estimate has been lowered to 19.1 mmt, according to local sources. We see a pivotal point currently at 100 mmt combined for the two countries, with a number below that level expected to have a noticeable impact on global wheat trading patterns. The southern half of Russia’s crop is under stress, while Ukraine’s wheat belt just experienced its driest 30 days of the past 45 years for the period, with the greatest concerns being over the eastern half of the belt. However, I want to keep some perspective here. Ukraine’s potential is still relatively good, due to good soil moisture reserves, whereas Russia’s crop could also benefit from improved moisture in June, if that were to occur. But a continuation of the pattern could lead to more losses, and potentially more price rationing by the market – perhaps significantly more, depending on how the weather plays out.
China bought another 30 cargoes or so of soybeans last week, focusing on filling June and July shipment needs, while also again adding a few new-crop cargoes from Brazil for early next calendar year. A couple of the above cargoes included U.S. soybeans from the Pacific Northwest when offers managed to compete with Brazilian offers. That’s been a rare occurrence of late. Otherwise, inquiries for U.S. soybeans remained thin. China is expected to import roughly 2 million metric tons more soybeans than it needs to crush in the months ahead, including active shipments of Argentine new-crop soybeans that qualify for China’s reserve program. These are soybeans that may be re-offered to the market later this year if China chooses to avoid purchases of U.S. soybeans as tensions surrounding Taiwan continue to grow.
China ended its war games around the island nation of Taiwan this weekend. It simulated attacks with bombers, while practicing boarding ships. The blockade around China was also designed to test China’s ability to prevent the United States from providing assistance to Taiwan. Some observers believe that there was nothing different about this exercise and others designed to intimidate, while others believe it is indication of an impending attack.
