September 28 – Stock futures were mixed to weaker this morning amid the prospect of a government shutdown this weekend, new highs for Treasury yields and crude oil approaching $100 per barrel. Risk factors are increasing for the economy, which has led to the recent weakness, but this week’s losses also have some traders squaring positions ahead of the weekend. The VIX continues to trade near 19 this morning, while the dollar index pulls back a bit to trade near 106.4. Yields on 10-year Treasuries are trading near 4.64%, after setting fresh 16-year highs just below 4.69% earlier in the session, while yields on 2-year Treasuries are trading near 5.11%. Crude oil prices are roughly 1% lower at this hour, after hitting a fresh 13-month high above $95 per barrel earlier in the session. Grain and oilseed prices traded modestly lower overnight ahead of today’s set of USDA reports.
First-time claims for unemployment benefits firmed slightly to 204K in the week ending September 23, up from 202K the previous week, but down from analyst expectations of 211K. This dropped the four-week moving average to a very low 211K claims, down from 217.25K the previous week. Continuing claims for the week ending September 16 rose by 16K, but they still remain at a low 1.670 million. Meanwhile, the four-week moving average for continuing claims fell by 12,250 to 1.674 million. These numbers continue to reflect a very tight labor market.
The third reading of gross domestic product for the second quarter had a few surprises this morning. Second quarter GDP growth remained at an annualized rate of 2.1% growth, which was below analyst expectations that it would be revised higher to 2.3% growth. Personal consumption expenditures in the quarter grew at an annualized rate of just 0.8%, down from analyst expectations that the number would remain unchanged at 1.7% growth. We should get updated data on personal consumption expenditures tomorrow morning, along with updated inflation data, but that may be the last of the official government data for a while if the government shuts down this weekend.
The long-end of the yield curve continues to push higher, with yields on 10-year Treasuries hitting fresh 16-year highs overnight. The Fed continues to get the blame for the higher rates, but a number of other factors are at play, which continue to get very little attention. Yes, the Federal Reserve is preaching a message of “higher for longer,” and that does suggest that the longer end of the yield curve was trading too low previously, especially if the economy is going to be resilient. But we do ourselves a disservice if we fail to recognize the other factors at hand that could significantly impact the future health of our economy and of commodity prices.
Rapidly rising U.S. debt is one of those factors, which requires increasingly larger supplies of debt certificates to be dumped onto the market seeking buyers. That’s related to this weekend’s possible government shutdown, but it’s been a growing problem over the past couple of decades, as pointed out by Fitch earlier this summer. A greater supply of Treasuries necessitates a larger supply of buyers, and higher yields are needed to attract sufficient buyers. Meanwhile, the Federal Reserve continues to reduce its balance sheet from the Covid era stimulus, which means that it’s buying roughly $1.14 trillion fewer debt certificates per year. Yields are also rising due to fears of another credit downgrade, likely by Moody’s this time, but we can’t rule out another one from either S&P or Fitch. Japanese investors were the largest foreign holders of U.S. debt certificates, but they are bringing more of their money home as Japan’s central bank starts to unwind yield curve controls. China also has fewer dollars to recycle as its exports decline, allowing it to reduce purchases of U.S. debt certificates. In essence, we’re looking at a restructuring of the debt markets after years of near-zero interest rates and massive government stimulus that resulted in record debt. The American consumer is addicted to spending, looking to credit cards to maintain the habit, while the U.S. government is essentially doing the same. The current showdown in Washington will likely come and go like so many of the others in the past, but I believe a much greater problem will emerge over the coming year as rising interest rates consume an even greater portion of the federal budget, bringing the whole issue to a head as the next debt ceiling is negotiated shortly after the 2024 elections.
USDA is scheduled to release its quarterly grain stocks and small grains summary reports at 11 a.m. Chicago time tomorrow. The stocks report is known for its market-moving surprises that often defy logic, leaving traders a bit on edge this morning. This may be the last official government data that we get to trade for a period if we see a partial government shutdown over the weekend. Look for USDA to modestly reduce the size of last year’s corn and soybean crops today. Otherwise, the focus will remain on harvest updates and South American weather. StoneX will release its updated customer survey production estimates Monday afternoon. Some forecast models suggest that welcome rains will return to Brazil crop areas in the days ahead, but other models are much drier.
