Perspective: Mid-Day Commentary for December 2

By: Arlan Suderman, Chief Commodities Economist

Fri, 02 Dec 2022, 17:04

Perspective: Midday Commentary

Arlan Suderman

Chief Commodities Economist

December 2 - This morning's robust jobs report spurred a sharp sell-off in stocks, although many of them have recovered a significant portion of those early losses in the hours that followed. Stocks remain largely in negative territory, but they are slowly trending higher to erase the early losses. The VIX is also trending lower, dipping nearly to 19 this morning, posting its lowest level since August 12. Treasury yields jumped when the jobs report was released, but yields on 10-year Treasuries have since settled down to trade near 3.57%. Crude oil prices fell with stocks on the data release, but they have largely erased the early losses to now post modest gains. The grain and oilseed markets are mixed as we approach midday.

The soybean complex has expanded daily trading limits today, after soyoil locked its daily limit lower on Thursday. The daily limits thus far do not look to be coming into play. Soyoil prices continue to feel the pressure of fund liquidation, as traders rethink their positions. Meanwhile, soybean prices are bouncing, with end users seeing yesterday's break as an opportunity to extend coverage. Thursday's selloff took soybean prices to the bottom of their trading range, with today's buying allowing prices to bounce off that support to this point. However, selling continues to pressure corn and wheat prices, which saw values break through chart support levels. It's the job of the market to find the price level that will stimulate demand. Prices are seeking that level now. The market tends to measure demand by weekly export sales and shipments, but exports are only a portion of demand. For corn, exports are a very small portion of overall demand.

China is the world's largest importer of commodities. As such, commodity traders will continue to pay a lot of attention to the state of its economy. Economic growth is currently quite stagnant in some sectors of China's economy, due to its dynamic-zero Covid policy. That policy is currently evolving. Authorities state that they are sticking to it, but they're changing how they interpret and apply it. The graphic below tracks Chinese Covid numbers through the life of the pandemic versus retail sales. Note how retail sales fell notably each of the two previous times that Covid numbers saw significant spikes. That is largely due to the widespread lockdowns that kept people at home. China did not issue stimulus checks as did the U.S. government, so people didn't have added money to buy online. Retail sales simply fell while people were at home.

So the question is, what will happen with the current outbreak, with Covid numbers still rising. We expect things to look different, but nobody really knows how it will play out. People in the United States were largely eager to get out and to get back to their pre-pandemic activities as things opened up last year. People in China are more risk adverse. There are obviously exceptions in both countries, but China also has an older demographic that is more vulnerable to Covid. As such, I anticipate that we'll see a decline in retail sales once again, but it may not be as steep of a decline. However, all of that could change if the death toll starts climbing due to China's healthcare system becoming overwhelmed. That remains the primary fear at this point.

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