November 13 – Inflation and retail sales data will largely be the focus this week, along with the political circus surrounding attempts to fund the government to avoid a shutdown on Friday. The VIX is trading near 15 this morning, while the dollar index is trading near 105.9. Yields on 10-year Treasuries are trading near 4.68%, while yields on 2-year Treasuries are trading near 5.08% - with both starting to turn higher again. Crude oil prices are steady this morning, while grain and oilseed prices are mixed, with the grains lower again and soybeans adding risk premium again.
We’ll get inflation data from the consumer level and retail sales data on Tuesday, and the inflation at the producer level on Wednesday. That data is expected to influence Federal Reserve policy decisions when the committee meets again in 30 days. The market currently places just 14% odds of a rate hike at next month’s meeting, with those odds rising to 28% at the January meeting. The Cleveland Fed currently forecasts less than 0.1% month-on-month growth in the consumer price index for October due to declining energy prices, with the core CPI rising at a little over 0.3% on the month. That would put year-on-year growth at 3.3% for the headline number, with the core CPI up nearly 4.2% on the year. It’s that latter number that remains a concern of the Federal Reserve, with its eyes largely on the “super-core” data of services minus shelter. There will certainly be more data to focus on in the coming weeks, but this week’s data could certainly be the focus of comments from various Fed members scheduled to speak this week.
Moody’s Investor Service cut its ratings outlook on U.S. government debt from stable to negative on Friday. It is the last of the Big 3 credit rating agencies not to lower its credit rating, but the change in the outlook may be a precursor to it doing so, and that has Wall Street nervous. The markets really don’t care much whether the government shuts down, unless it’s a prolonged shutdown, but they do care if the U.S. credit rating is lowered. Both S&P and Fitch have already lowered the U.S. credit rating by one notch – S&P did so in 2011 and Fitch did so back in July of this year. Moody’s affirmed the long-term issuer and senior unsecured rating of the United States government at Aaa. Yet, it pointed out the challenges to the fiscal strength of the United States – its large fiscal deficit, higher interest rates, and the lack of an effective fiscal policy to reduce government spending or increase revenues.
Moody’s also pointed to the political brinkmanship in Washington that makes solutions difficult to achieve, stating that the “continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.” Moody’s went on to state that it expects the U.S. to “retain its exceptional economic strength,” and that “further positive growth surprises over the medium term could at least slow the deterioration in debt affordability.” Newly elected House Speaker Mike Johnson released a funding plan on Saturday that was quickly criticized by members on both side of the aisle, reinforcing Moody’s concerns. Nonetheless, the Saturday release would allow the plan to be voted on by Tuesday of this week. Yet, the plan is not expected to receive the support of the Democrat-controlled Senate, or of the White House, leaving us at risk of a shutdown this weekend. Wall Street’s concern level is relatively low this morning, based on market response, largely due to Moody’s attempts to reassure the markets in the wording of its statements. But the risks of a credit downgrade continue to linger in the background. The July downgrade by Fitch resulted in a sharp “risk-off” day in the commodity markets, despite bullish news in the fundamentals that day.
Soybean futures plummeted on Thursday when USDA raised its U.S. soybean yield estimate, rather than lowering it. Prices bounced modestly on Friday, and then gapped higher overnight to add modest gains to Friday’s action. Risks still remain in Brazil, while Argentina’s growing season appears to be off to a much better early start. I mentioned late last week that the correlation between November rainfall in Center-West Brazil and final average Brazil soybean yields is extremely low at just 0.09%, based on work done by Eric Snodgrass of Nutrien Solutions, who was able to examine the historical Brazil rainfall data. That’s largely because there’s not a lot of variability in Center-West soybean yields from year-to-year. A drop of more than 10% from trend yield is rare. It can happen, but it doesn’t happen very often. This might be the year, but the historical odds are against it. Commodity Weather Group’s analysis on extreme wet in southern Brazil shows good correlations, that could result in a 10% drop in yields there. In between, growing conditions are rather good, but let’s assume a 10% decline for Brazil overall. That would drop Brazilian production by 16 million metric tons. Keep in mind that Argentine production is expected to rise by 23 mmt this year, and a shift in acreage may make that closer to 25 mmt. That means less crushing for meal exports in Brazil. Global demand is expected to rise by 20 mmt this year, but that’s likely overly optimistic. There are more signs of demand plateauing in China. The bottom line is that there is a path for Brazil yields to fall by 10% and USDA not needing to increase its U.S. export target unless there are indications of greater losses in Brazil. That will be this week’s focus – to see if rains in the forecast for next week verify this time.
