Perspective: Mid-Day Commentary for February 4

By: Arlan Suderman, Chief Commodities Economist

Tue, 04 Feb 2025, 17:47

Perspective: Mid-Day Commentary

Arlan Suderman

Chief Commodities Economist

February 4 - Strength returned to the commodity and equity sectors early today on reports that President Trump would have a conversation with Chinese President Xi Jinping today. The two world leaders have vastly different values and objectives for their respective countries. They may not like each other, and likely don't trust each other. But they have a history of a mutual relationship of respect, which allows them to do business. And while both have taken steps for their respective countries against the other, both have also shown restraint thus far, and have actually moved closer to one another. This raises hopes that we could see some type of an agreement reached between the two that would be mutually beneficial. The issues are quite complex with China, so it would be a surprise to see an agreement reached as quickly as we did with Canada and Mexico, but the markets are still encouraged when we see progress toward an agreement that could provide stability.

The objectives with China are two-fold. The current focus is on the flow of fentanyl into the United States that originates in China. That was the primary objective behind the weekend's 10% tariff placed on $450 billion in goods flowing to the United States. But Trump is also concerned about the roughly $280 billion trade imbalance with China, in addition to his concerns about China's efforts to displace the dollar as the global currency, as well as China's history of theft of intellectual property. On top of that, Trump is serious when he says that "tariff" is a beautiful word. He strongly believes that we would be better off funding portions of the U.S. government with foreign money rather than internal income taxes. As such, the tariff issue with China isn't likely to go away with the fentanyl issue, and it likely won't be long before we're talking about tariffs with the European Union as well. This will continue to keep the headlines flowing from the White House for some time, impacting money flow in and out of various sectors of the markets, with the commodities in the middle of it all. For now, the primary focus is on our two largest strategic trading partners in Canada and Mexico. The graphic below shows the volumes of corn, soybeans and wheat that the United States exports to Canada and Mexico, with the bulk of it going to Mexico. Fortunately, Mexico's President Sheinbaum has been the easiest for Trump to work with to this point.

The market previously priced in expectations that tariffs would be inflationary, which also supported Treasury yields. Hopes that everything will be worked out with Canada and Mexico relieve those fears, leading stocks to firm, while the dollar index follows Treasury yields lower. The VIX is trading lower near 17, while the dollar index is trading near 108.1. Yields on 10-year Treasuries are trading near 4.52%, while yields on 2-year Treasuries are trading near 4.21%. Crude oil prices are modestly lower, but well off their session lows, while the grain and oilseed markets are mostly higher on today's developments on the tariff front. In the proteins, lean hogs are higher on the paused tariffs, while cattle are lower as the Mexican border slowly opens up again to feeder cattle flowing north, and on chart signals.

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