By: Arlan Suderman, Chief Commodities Economist
January 5 - Stocks remain under pressure through the morning on the heels of today's tight labor market data and bearish comments from the U.S. Fed, with all three major indexes down ~1.2% at the time of writing. The VIX is rising on the added uncertainty, pushing up above the 22.6 level. The dollar is maintaining its strength, pushing above 105 for the first time in nearly a month. Treasuries have cooled slightly through the morning, though still in the green, with 10-year yields at 3.73% and 2-year yields around 4.5%. Nearby WTI crude oil is still hanging around the $74/barrel mark despite a surprisingly large uptick in U.S. crude oil stocks, with this morning's EIA report showing an increase of 1.694 million barrels last week compared to expectations of a 1.154 million barrel rise. Gasoline stocks fell by 346K barrels vs. forecasts of a 486K drop, while distillate stocks fell by a whopping 1.427 million barrels, far surpassing expectations of a 396K drop and marking the largest weekly decline seen since early October. The ags remain mixed on relatively quiet trade with a lack of much fresh fundamental news until next week's updates from the USDA.
Fed officials warned of the need to hold rates at elevated levels even after hikes are complete until it becomes more clear that inflation is steadily moving towards the Fed's 2% target. KC Fed President Esther George and Atlanta Fed President Raphael Bostic both expressed the same sentiment in their respective public addresses this morning. George stated that she believes the Fed will need to lift their target rate to above 5% and stay there for "some time," further dashing hopes of a pivot to rate cuts some time in the second half of 2023. Jim Bullard's speech is still due this afternoon, though it is unlikely the bulls will hear the good news they're after.
S&P Global's Composite PMI Index for December was revised up slightly from its initial reading of 44.6 to a final reading of 45. This index tracks business activity variables such as sales, new orders, employment, inventories, and pricing across the manufacturing and services sectors, with readings above 50 indicating expansion and readings below 50 indicating contraction. This is now the third consecutive monthly decline in the Composite PMI and the sixth consecutive month of contractionary readings, highlighting the recent slowdown in U.S. business activity. The Services PMI portion fell to 44.7 from 46.2 in November, while the Manufacturing PMI portion fell to 46.2 from 47.7 seen in November.
No ships were reported to be making their way to Ukrainian Black Sea ports yesterday, potentially a sign of insurers backing away from taking on the risk of reinsuring ships through the export corridor as the calendar turns to the new year. There have been rumblings of this issue arising for some time now, and it could look to derail Ukrainian ag exports just as they were picking up steam. Despite the improved exports in recent months, Ukrainian farmers and grain handlers are still facing severe storage shortages. Exporters already face the added difficulty of direct Russian missile attacks as well as issues arising from losing power due to continued attacks on Ukrainian energy infrastructure. With no end in sight to the war, Ukraine's economy needs to maintain its ag exports in order to provide financing for its war effort and recovery, as well as providing farmers with the financing needed for next year's crops. The situation remains very unclear for now, but it will need to be monitored closely in the days/weeks to come.
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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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