August 12 – It’s all about inflation and retail sales this week on Wall Street, with consumer sentiment putting a bow on trading on Friday. Stock futures traded cautiously higher overnight ahead of this week’s key economic data releases that are expected to help set the tone for the September Federal Reserve meeting. The VIX is trading near 21 this morning, while the dollar index is trading near 103.3. Yields on 10-year Treasuries are trading near 3.96%, as they consolidate just below the 4% level ahead of this week’s data, while yields on 2-year Treasuries are trading near 4.07%. Crude oil prices continue to rebound from this month’s collapse on economic worries, as recession fears ease and traders focus more again on escalating Middle East geopolitical risks. The grain and oilseed markets were mostly lower overnight amid expectations that today’s big USDA WASDE crop report will again reflect ample supplies of the commodities in that sector.
Fed fund futures traded nearly 50% odds this morning that we’ll see a 50-basis point rate cut from the Federal Reserve when it meets again in mid-September, while also pricing in expectations that we will see the Fed cut its benchmark rate by 100 basis points by the end of the year. Keep in mind that the markets have been wrong for the past couple of years, but the Fed has thus far done nothing to dispel these market expectations. As such, we must respect the possibility that we’ll see significant rate cuts in the months ahead. This week’s inflation data will include the producer price index on Tuesday and the consumer price index on Wednesday, with retail sales data coming in on Thursday, along with another weekly jobless claims number. Wall Street expects this week’s data to support its expectation that we continue to trend toward the 2% inflation mandate, while also seeing a slowdown in the economy. Wall Street fears a recession, but recessions are a normal part of the business cycle. Excluding the very brief recession that we experienced when we intentionally shut down the economy due to the pandemic in 2020, we haven’t experienced a recession since 2008/09. That’s a very long time to go without a recession in the history of the U.S. economy. The U.S. economy has suffered through a dozen recessions over the past 80 years, with an average of 6.5 years between each recession.
The People’s Bank of China released its quarterly report today, repeatedly vowing to support housing rentals in trying to stabilize the nation’s property market. China has an enormous quantity of unsold properties, and the people are looking to the government to solve the problem. It’s normal for an individual to have 40% of his / her wealth tied up in property, so declining property values erode away at an individual’s available wealth, while also eroding consumer confidence. That results in less retail spending, which tends to weigh on the economy. As such, turning around China’s property sector is largely seen as an essential component of stabilizing China’s economy, but China’s efforts have thus far fallen short of doing so. Policy incentive have increased demand for property, but just to a fraction of what is needed to stabilize the market. The government is currently leaning toward increasing urbanization to pull more rural people into cities to increase demand for housing, but a private sector report just released suggests that a declining population may make it difficult to sufficiently increase demand with these efforts. This report estimates that China’s annual housing demand for the five years ending in 2030 may be down by 20 – 25% due to declining population trends.
USDA releases its big August WASDE crop report at Noon Eastern Daylight Time today, which will set the tone for the next several months in the grain and oilseed markets. It’s very unusual for the August report to mark the bottom of a market, but it can happen. The bottom line is that the markets typically do not post their harvest lows until the market is confident that it has a handle on the maximum potential size of the corn and soybean crops. That typically happens when a) we see a trend toward lower projected yields by USDA, or b) we’re far enough along in the harvest to be confident in our knowledge of the size of the crop. We’re still several weeks away from the start of harvest for the primary growing areas of the Midwest, so that latter is not yet in play, leaving us focused on the trend in yields from USDA.
July was generally favorable for crop development for the bulk of the Midwest, which I highlighted last week with discussion about the weather trends and resulting NDVI satellite data. As such, the expectations are that we will see USDA bump its yield projections higher later today. That tends to lead to a “big crops get bigger” mentality among traders, raising the potential question of, “how big will they get?” Thus far, August weather to date combined with forecasts for the rest of the month tends to support further growth in yield potential for the September report. As such, traders will likely need to see the September report, and to start seeing harvest results, before it will be able to get a handle on the potential size of this year’s crops.
