May 6 – Stock futures again came under pressure overnight, as investors brace for tomorrow’s policy statement from the Federal Open Market Committee, while also assessing the current tariff situation. We’ve seen the major stock indices move back up toward the top of the volatile April trading range, but sustaining a move above that range may take greater reassurance of progress toward tariff-reducing trade deals, which have not come yet. There’s an emerging optimism that they may start to come over the next week or two, but they have not yet to this point. As such, the VIX is slowly creeping higher again, trading near 25 this morning, while the dollar index is trading near 99.5. Yields on 10-year Treasuries are trading near 4.34%, while yields on 2-year Treasuries are trading near 3.80%. Crude oil prices found fresh buying interest on yesterday’s collapse down to just above $55, with that strength carrying over into today’s session as well. The grain and oilseed markets were quietly mixed overnight.
Fed fund futures are trading 97% odds this morning that we will not see the Federal Reserve change its benchmark interest rate at the conclusion of this week’s meetings tomorrow afternoon. Keep in mind that the market is nearly always wrong in its expectations of what the Fed will do in its projections forward, but it has currently priced in expectations of a rate cut coming in July, with two more cuts coming before the end of the year. The market had originally expected the next cut to come early this year, but it keeps moving that next rate cut later and later into the year. To be fair, the Fed’s famous dot-plot graphic that reflects the expectations of its individual policymakers is usually wrong as well. We just do not think that this Fed has the data that it is looking for to say that inflation is sufficiently under control to give it the freedom to make rate cuts in the near term.
China just completed its five-day May-Day holiday celebration, with some positive signs that people there were ready to celebrate. It’s not a secret that China’s economy has been hurting, with exports dropping on the tariff war, and with domestic consumption slumping on near-record low consumer confidence. But consumers were eager to get out and travel during the five-day holiday period, focusing on lower-cost travel destinations to smaller cities and towns that were perhaps less well known in the past. As such, the number of trips registered rose 8% above the previous year’s level, while retail and catering businesses saw business increase by more than 6% on the year. This provided a modest bump for China’s stock market today. However, China’s largest trade exhibition of the year, the Canton Fair, concluded on Monday with notably reduced participation by buyers from Europe and the United States, reflecting the challenges facing China’s manufacturing and export industry. That’s lost export business that’s difficult to replace with buying from emerging economies.
Relations between China and the United States appear to be thawing somewhat. I continue to see evidence of low level talks taking place between the two countries. However, I do not see evidence that these talks are at a high enough level to reach a trade agreement. I expect that to take a considerable amount of time, largely because I think that President Xi Jinping believes that time is on his side, and that he would lose more by negotiating than by holding out, waiting for President Trump to lose sufficient support in the United States to see his tariff war collapse. Nonetheless, China has taken steps toward the United States. It replaced its hardline negotiator with someone with a reputation of being more of a moderate. China is also said to be looking into possible actions for stopping the flow of fentanyl into the United States – something that it has refused to do in the past.
USDA pegged this year’s corn planting progress at 40% as of Sunday, which was one point above the five-year average for the week. Soybean planting progress was pegged at 30%, up 7 points from the five-year average for the week. Producers have a wide open window over the coming week to 10 days across much of the Midwest, which is expected to bring rapid planting progress to the region, with generally favorable conditions for quick germination and emergence. That sets the foundation for good crops in the growing season ahead. We must still see favorable weather the rest of the growing season, but it means that we will have moved past the first potential obstacle to good yields if we can get the crops planted and established in a timely manner. The current outlook calls for warmer temperatures to boost early crop growth, combined with periodic showers to provide moisture as we move through the last half of May into early June. We could see a few planting delays emerge in the Northern Plains mid-month for spring wheat, but progress is currently 10 points above the five-year average for the date at 44% planted. The above has July corn testing an area of chart support near the March lows, while July soybeans continue to trade above the April lows on hopes that we will soon hear from the U.S. Environmental Protection Agency regarding the biomass diesel production mandates. Wheat prices continue to seek levels that will support demand, which has been lacking on the global market, and that presents some additional challenges for corn prices as well.
