By: Arlan Suderman, Chief Commodities Economist
September 1 – The new month began in “risk-off” mode on Wall Street, with stocks and commodities both on the defensive overnight amid lingering economic problems. The VIX traded either side of 27 overnight, reflecting elevated fear levels on Wall Street. The dollar index traded near 109.3 this morning. Yields on 10-year Treasuries are trading near a new two-month high of 3.25%, while the yields on 2-year Treasuries are trading near 3.51%. Crude oil prices are down more than 2%, while the grain and oilseed sector is down by roughly 1%.
First-time claims for unemployment benefits fell to 232K in the week ending August 27, falling short of analyst expectations of 246K claims. Furthermore, the previous week’s claim number was revised to 237K, down from the 243K claims originally reported. As such, the four-week moving average for claims fell to 241.5K, down from 245.5K previously. Continuing claims in the week ending August 20 rose by 26K to 1.438 million, continuing a trend that we’ve seen in recent weeks, although the number remains relatively low from a historical perspective. On a related matter, today’s Challenger Job-Cut report indicated that announced corporate layoffs in August fell to just 20,485, down from 25,810 the previous month. That would suggest a more stable job outlook.
Non-farm productivity fell at an annualized rate of 4.1% in the second quarter, which is an improvement from the previous estimate of a 4.6% decline, and better than the 4.4% decline anticipated by analysts. This is the second reading for the second quarter data. Unit labor costs rose at an annual rate of 10.2% in the second quarter, down from the 10.8% originally reported, and below analyst expectations of 10.7%. This suggests that wage inflation was a very big problem in the second quarter, but it wasn’t quite as big as initially indicated.
Tackling inflation is the greater priority than avoiding a recession, according to comments made by Loretta Mester. Mester, the president and CEO of the Federal Reserve Bank of Cleveland, spoke publicly on Wednesday, essentially saying, if we need to go into a recession to control inflation, then so be it. Mester expects the Fed’s benchmark interest rate to top 4% this year, which is currently above market expectations of 3.75%. She also does not expect to see the Fed reverse course with a lowering of rates until at least after 2023. In other words, Mester sent a message that rates are expected to rise more aggressively than anticipated by the market and remain so for longer than expected. Mester is just one voting member of the Federal Open Market Committee, but the policy group as a whole has generally spoke with one voice over the past several months, trying to convince the markets that it is serious about tackling inflation.
Her comments echo those made by Fed Chair Jerome Powell last week while addressing the Kansas City Federal Reserve’s annual economic symposium at Jackson Hole, Wyoming. He stated, "While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain." The Fed steps up its plan to reduce the balance sheet – withdrawing stimulus – today by no longer reinvesting proceeds of up to $60 billion in maturing Treasury securities each month, and $35 billion maturing agency mortgage-backed securities. That’s doubling the pace at which it has been shrinking the balance sheet this summer. This quantitative tightening is also expected to begin to push interest rates higher as the demand for Treasuries falls below the supply of Treasuries at an anticipated rate of roughly $2.5 trillion per year, necessitating higher yields to attract new buyers.
Ukraine shipped more than 1.5 million metric tons of grain and product from three approved ports in August, riding through safe passage corridors on 65 ships – most of which were small. That’s about a quarter of what was shipped the previous year. Of the total, 64% of the volume was corn, while just 18% was wheat. Meanwhile, U.N. inspectors finally reached Europe’s largest nuclear plant near Kherson in southern Ukraine, which has been the focus of some shelling. In fact, their arrival was delayed by shelling near the plant. Authorities worry that an errant shell could trigger a nuclear disaster at the plant, which could contaminate vast areas of cropland for years to come. There have already been several near disasters at the plant that workers were able to contain. Otherwise, the overnight focus was on trading recession fears in the commodity space. StoneX will be releasing the results of its monthly producer survey this afternoon, revising projected corn and soybean yields for the current crop year. Meanwhile, China continues to buy soybeans at a time when USDA’s comprehensive weekly export sales reporting system is down. The agency plans to revert to its old reporting system that previously worked well on September 15, while working to fix the new system. USDA’s daily reporting system indicated this morning that “unknown destinations” bought another 14.6 million bushels of soybeans, bringing announced purchases to China and to unknown since August 23 to 1.6 mmt, or 58.8 million bushels, but we do not have confirmation of how many sales have slipped through the daily reporting system while the broader comprehensive report was down.
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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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