By: Arlan Suderman, Chief Commodities Economist
October 6 – The euphoria on Wall Street to start the month has already started to erode as fear creeps into traders minds once again. The fear was never really gone, as the VIX remained elevated amid the early week buying, but it’s moving to the front of traders’ minds once again. This morning’s headlines spoke of recession fears being tied to central banks tightening money policy, and that they have no choice because of the track of the Federal Reserve. Don’t you love it when journalists think that they are economists? The headlines also suggested that inflation is only a matter of energy prices and lingering supply chain issues. Again, not understanding how economics function. But those headlines are reflective of the thinking of Wall Street as well. Stock futures came under modest pressure overnight, with the VIX trading back near 29. The dollar index firmed to trade near 111.4. Yields on 10-year Treasuries are trading near 3.75%, while yields on 2-year Treasuries are trading near 4.15%. Crude oil prices are modestly lower following this week’s sharp gains, while the grain and oilseeds pulled back as well in a modest “risk-off” mode for many of the assets trading overnight.
First time claims for unemployment benefits rose to 219K in the week ending October 1, up from a very low 190K the previous week, and up from analyst expectations of 203K. Continuing claims for the week ending September 24 rose 15K to 1.361 million. This is the number we need to keep an eye on for signs of an easing jobs market. It’s still a low number, albeit with this week’s total starting to edge higher.
OPEC+ approved a 2-million barrel per day cut in output on Wednesday. The question is, where will it leave supplies down the road. OPEC+ members already fell 3+ million barrels per day below their quotas last month, as they struggle to meet the goals. The cartel will need to increase output by 1.2 million barrels per day just to get up to the new quotas reached this week, even though those quotas fell by 2 mbpd. Even so, crude oil prices rallied more than 10% this week off last month’s lows in anticipation of the move by OPEC+, and in response to it. That’s what cartel members care most about, but they also want to be flexible enough to respond to potential policy changes in China later this month that could reopen its economy. Risks continue to exist that we could see tighter energy supplies in 2023, although the market’s response to that possibility has been muted by fears of a broader global recession that continues to cut consumption.
Add North Korea back to the list of geopolitical risks. The rogue government flew a missile over Japan, and it’s longest distance to date, on Tuesday. That elicited a response from both South Korea and the United States on Wednesday, when the two conducted rare missile tests in the region, even as the U.S. positioned a supercarrier just east of North Korea to send a message. The aircraft carrier Ronald Regan made port in South Korea last month for the first time in years. It will now position itself between Korea and Japan. Both U.S. and South Korean troops fired a volley of missiles into the sea on Wednesday in response to North Korea’s actions, while a meeting of the U.S. Security Council was also called. Both Russia and China jumped to North Korea’s defense in the meeting.
The tentative rail agreement brokered by the Biden Administration continues to work its way through the rank and file of the unions involved. Many union members are not happy with the agreement, but it’s yet to be determined whether a majority of each union involved will ratify it. Failure of all of the 12 unions to ratify would result in the status quo continuing longer and could result in a work stoppage. That’s right. We still could end up with a rail strike. The last of the unions should complete the process by mid-November, so it will be a while before we know whether the issue is resolved. Regardless, freight costs are going up. The agreement includes a 24% pay raise scaled in over time, along with changes in worker rules that may reduce rail capacity due to worker shortages. Of course, an actual rail strike would be even more inflationary, while also disrupting significant supply chains. Corn is the number one commodity moved by rail at more than 691K cars in 2020. That’s followed by grain mill products at 388K cars, and by ethanol at 383K cars. Soybeans, wheat, and soybean products are right behind those totals.
Ukraine’s winter grain acreage may fall by as much as 50% according to a private grain company in Ukraine, although the government still says we may see “just” a 20% decline. Regardless, the grain and oilseed markets were weaker overnight, reflecting heightened fear that global recessionary problems may erode demand for food- and energy-based commodities in the months ahead. It’s still a headline driven market.
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A strong super El Niño has started, but the crop damage that would lift food prices is still expected to land between September and December. Indian wheat area and Southeast Asian palm oil production sit at the front of the transmission chain, with Brazil the larger unresolved question.
Damage to Black Sea ports has stalled grain exports, but the more serious risk is now forming on the farm. Collapsed farmgate prices and a Russian fuel crisis have put part of the wheat harvest in question.
August 13 – The major stock indices traded quietly mixed overnight ahead of this morning’s weekly job numbers and producer price index data. Like Wednesday, this morning’s data was considered good as well, providing support for stocks while generally allowing Treasury yields to slip a bit lower. The VIX is trading near 14.4, which is just above yesterday’s new low for the year. The dollar index is trading near 99.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.15%. WTI crude oil is trading near $81 per barrel, while Brent trades near $87 per barrel. Wheat prices again firmed overnight on geopolitical risks in the Black Sea Region, while corn and soybean prices pulled back modestly from yesterday’s big gains.
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