November 8 – Stocks edged higher early this morning ahead of comments from Federal Reserve Chair Jerome Powell on hopes that he will provide the markets with greater confidence that a pivot in monetary policy is coming. The VIX fell to a fresh seven-week low below 15 in early trade, while the dollar index firmed to trade near 105.8 as the euro dropped in value. Yields on 10-year Treasuries traded near 4.57%, while yields on 2-year Treasuries traded near 4.94%. Crude oil prices are trading roughly 1% lower this morning, after falling to their lowest level since late July on global demand concerns as economic activity slows. WTI crude oil prices are down nearly $20 per barrel over the past 40 days, despite Middle East war risks. Meanwhile, the grain and oilseed sector was broadly higher overnight, led by soybeans posting new highs on Brazil production concerns.
Funding for the U.S. government runs out in nine days if Congress fails to pass an extension for funding. We find ourselves in a very similar situation to where we were in late September, when the Speaker of the House was voted out of office by fellow Republicans when he pushed through a stop-gap funding bill that would keep the government funded until November 17. The goal of conservative Republicans was to see the House follow its prescribed Constitutional responsibility to pass 12 annual funding bills for the different sectors of the government, versus one big omnibus bill that lacked transparency. They would probably have had those 12 bills passed if not for the weeks that it took to select another leader, leaving them in a similar position to where they were in late September. The markets don’t really care if the government shuts down, unless it is an extended shutdown, which it rarely is. But the markets do care if the political circus results in another credit downgrade, which raises interest rates on both U.S. debt, as well as the debt the U.S. consumer and business community, providing a drag on the economy. Those risks are going up with each day we move closer to November 17 without a resolution. The risks for another credit downgrade may be low, but should it happen, the implications are significant.
The Asia-Pacific Economic Conference will convene next week in San Francisco, with China’s President Xi Jinping in attendance. Xi is expected to attend a dinner that gathers U.S. business leaders, delivering an address to the group to ease their concerns about doing business in China. Businesses from both Europe and the United States have been deleveraging from China, creating significant economic stress for its export-oriented economy, as I outlined in yesterday’s commentary. Perhaps more significantly, U.S. President Joe Biden would like to meet with Xi at the APAC conference, but Xi has not yet agreed to the terms of the meeting. Negotiations continue, but thus far no commitment has been made to meet with Biden on the sideline of the conference. No major agreements are expected if they do meet, but talking is certainly better for easing stress than not talking.
China stepped up its purchases of U.S. soybeans on Tuesday, showing signs of chasing this market higher on fears that dry weather in Brazil might curtail production enough to take prices significantly higher. The risk for China is two-fold. First, it is concerned about delays in planting that can lead to delays in new-crop supplies being available, requiring it to take more soybeans from the United States over the next several months to fill the gap. That further tightens an already tight U.S. balance sheet that may get even tighter tomorrow if USDA makes another cut to this year’s yield projection. The second risk is that the developing heat and drought in the Center-West portion of Brazil would notably reduce the size of the crop, leading Brazil to run out of supplies before the U.S. 2024 harvest.
We’re a long way from that happening currently, but neither can such be ruled out, with the forecasts still looking hot and dry for Center-West Brazil over the next 10 days, elevating stress levels. It’s not unusual for China to come back to the United States for supplies in July and August, ahead of the U.S. harvest. The problem is, with strong domestic crush demand this year, the U.S. may not have supplies available in July and August. The above lists a lot of potential things that can go wrong, all or part of which may not happen. But the Chinese buyer must ask themselves if they can afford to take that risk. Some have apparently decided to hedge that risk by stepping up purchases now before a potential larger runup in prices. Initial reports suggested that Chinese buyers bought 10 cargoes of U.S. soybeans yesterday totaling more than 22 million bushels, but today’s data suggests that purchases may have been as much as another 50% higher than that. I commented yesterday morning that we had not yet seen evidence of the Chinese buyer chasing this market higher. We now have that evidence. The focus now shifts to what USDA does with this year’s U.S. yield estimate in tomorrow’s WASDE crop report.
