May 3 – Stock futures pushed cautiously higher ahead of this morning’s monthly jobs report, but the report quickly provided fresh energy to the markets. The VIX slipped lower to trade near 14, but then dropped below 14 following the data release. The dollar index traded near 105.2 prior to the report, but then followed Treasury yields lower to trade near 104.8 at this hour. Yields on 10-year Treasuries are trading at a three-week low near 4.49%, while yields on 2-year Treasuries traded at fresh three-week lows near 4.77% as the inverse continues to narrow. Crude oil prices are mixed, while the grain and oilseed sector saw follow through buying from Thursday’s rally, gaining a fresh surge of buying when the jobs report was released.
The economy created 175K jobs in April, below analyst expectations of 243K. However, March job creation was revised upward by 12K, while February was revised down by 34K. The more significant job gains in April came in healthcare, social assistance and in transportation and warehousing. The unemployment rate ticked upward to 3.9% in April, while the number of unemployed people remained little changed at 6.5 million. The number of long-term unemployed (27 weeks or longer) was little changed at 1.3 million, accounting for 19.6% of the total. The labor force participation rate was also unchanged at 62.7%, while the same was true for the employment – population ratio of 60.2%. It was interesting to note that retail added 20K jobs in April, which came in above its 12-month average of 7K jobs added per month. Government added just 8K jobs in April, down from its 12-month average of 55K per month. Average hourly earnings rose 7 cents or 0.2% in April to $34.75 per hour. That brings year-on-year gains to 3.9%. The average workweek slipped to 34.3 hours, down from 34.4 hours previously.
Wall Street looks at all of these data points through a filter shaded by its current sentiment, and that tells us something about the tone on the Street. The focus on today’s numbers was on an uptick in the unemployment rate and a downtick on gains in average hourly earnings and the average workweek. There were no big surprises in this morning’s jobs report, but that in itself was seen as a positive. Treasury yields initially spiked, and then plummeted, with the dollar following them lower. Stock futures surged on the renewed enthusiasm. The economy is resilient, and Wall Street has renewed hopes of a rate cut this year – in fact pricing in the probability of two cuts by the end of the year again. The headline number in today’s jobs report came in lower than expected, after five consecutive misses to the high side, and Wall Street is ready to celebrate. It clearly sees today’s jobs report as a victory following its recent record of stronger-than-expected reports. That’s why an essentially ho-hum report can be seen as a weak report by traders, justifying a risk-on sentiment as we head into the weekend.
The broader commodity sector also saw a reaction to this morning’s jobs report. A robust economy creates more demand for commodities, with plenty of geopolitical and weather risks present to argue against holding short positions in the sector. Fund managers unwound short positions in the crude oil market long ago on rising geopolitical risks, but they’re largely still in the process of doing so in the grain and oilseed sector. Today’s data doesn’t meet the criteria for a rate cut, although we know that Powell would truly like a cut or two for legacy purposes. Many systemic reinflation factors remain in place, as illustrated by other recent data reports – another reason for fund managers to question their short positions in the commodity space. But for now, Treasury yields are falling on rate cut hopes, while also benefiting from this week’s decision by the Federal Reserve to slow its pace of shrinking its balance sheet. That drags the dollar lower, and that too benefits the commodities. Not every commodity will go up, but the grain and oilseed have been beat up by managed money for the past 22 months, and they’re currently benefiting from a reversal of that sentiment, combined with some supportive fundamental news.
We first warned that Argentina’s corn crop could drop 7 – 10 mmt to the 45 – 47 mmt range late last month due to a disease spread by leaf hoppers. USDA won’t likely go down that far next week, but the Buenos Aires Grain Exchange did, dropping its production estimate to 46.5 mmt yesterday. Keep in mind that USDA continues to call for a 2.1-billion bushel plus carryout for the current marketing year here in the States, so we need to see South American production fall by something closer to 15 mmt to justify rationing demand with higher prices. That may happen, but we’re not there yet. South America’s problems would be expected to increase U.S. exports in our next marketing year, and we have another growing season between now and then. Thus far, problems in South America simply shrink the safety net against potential problems in our Midwest growing season, putting a bit more focus on our summer weather pattern. As for soybeans, persistent rains in Rio Grande do Sul in southern Brazil may create some quality problems and harvest losses in the last 6 mmt of harvest, which by itself is not enough to support a sustained rally in U.S. soybean prices. This week’s labor strike that shutdown the Argentine oilseed industry was short-lived, although it is expected to start again when that country’s Senate takes up the labor reform bill being proposed. Wheat continues to get underlying support from dryness stress impacting 45% of Russia’s winter wheat belt, with the next few weeks being critical for the crop’s development, while dry areas of the southwestern U.S. Plains shrank a bit this week.
