August 15 – A modest “risk-off” sentiment pressured commodity and stock futures overnight, with this morning’s retail sales data adding to weakness in the equities. Added concerns come from more negative economic news out of China. The VIX is trading near 15 this morning, while the dollar index is trading near 102.9, placing it just below the 200-day moving average that it unsuccessfully probed above on Monday. Yields on 10-year Treasuries spiked to a fresh nine-month high above 4.27 when the retail sales data was released, but then quickly erased those gains to trade near 4.21% at this hour. Yields on 2-year Treasuries are trading near 4.96%, after spiking briefly to a five-week high above 5.02% on the data release. Crude oil prices were down roughly 1% in early trade, while the grain and oilseed markets were modestly lower as well.
Retail sales rose 0.7% month-on-month in July, up from analyst expectations of 0.4%, while the June data was also revised higher to 0.3% gains, up from the 0.2% originally reported. Retail sales excluding vehicles rose 1.0% month-on-month in July, beating analyst expectations of 0.4% growth, and up dramatically from the 0.2% growth seen in June. In fact, retail sales excluding both vehicles and gas also rose 1.0% month-on-month in July, up from analyst expectations of 0.4% growth and up from 0.4% growth in June. The initial market response was that today’s data will necessitate that the Fed push interest rates higher for longer, with Fed fund futures currently trading roughly 40% odds of another rate hike by the end of the year, although that’s not much different than yesterday’s trade. Fears of another rate hike quickly turned into a focus on problems in the manufacturing sector, with the Empire State manufacturing index falling to -19.0, down from +1.1 the previous month. This combined with more weak economic news out of China to offset concerns about possible additional Federal Reserve rate hikes.
Apparently, a decline of the ruble to 100 rubles to the dollar was too much for Russian President Putin, who picked up his phone to “request” that Russia’s central bank hike its benchmark interest rate to 12% today, up from 8.5% previously. The ruble was trading near 60 a year ago today, but it pressed above 102 yesterday. It tumbled to 92 on today’s move, but it has already risen back to trade near 98. The massive interest rate hike has not yet been enough to attract investor interest in a country that is slowly deteriorating under Putin’s war with Ukraine that seems to linger on and on with no end. If anything, the war continues to escalate, draining Russia’s economy in the process. A weak ruble allows Russia to sell commodities at cheaper prices on the world market, including both wheat and crude oil, but it also makes it very expensive to import items needed to sustain its economy, as well as sustain its war effort. Russia sets its wheat price at whatever level is needed to undercut the rest of the world, so today’s move isn’t likely to change the volume of wheat coming out of Russia, or crude oil either for that matter. However, Russia has been working with other OPEC+ members to reduce the overall supply of crude oil to prop its cash price prospects to aid in funding its war effort.
The Chinese yuan fell to fresh nine-month lows versus the dollar today as it traded near 7.29 yuan to the dollar. The Shanghai Composite Index fell another 1% today, before recovering to close the session near unchanged. China’s central bank cut its key benchmark rate another 15 basis points to 2.5% today, responding to this week’s poor economic data. China’s economy is seriously in need of stimulus but doing so during a time of monetary tightening in the United States and elsewhere puts downward pressure on the yuan at a time when China wants the world to see its currency as an attractive alternative to the dollar as a global currency. China Direct previously indicated that the Fed’s current larger-than-normal window between policy meetings provides a sliver of an opportunity for China’s central bank to cut rates, although doubts remain about its effectiveness. China’s retail sales grew just 2.5% in July, which is the lowest increase of the year and below expectations of 4.4-4.5%. The entire social sales sector was down 8% month-on-month in July, reflecting sluggish domestic consumption. Sales of clothing, cosmetics, jewelry, telecommunication devices, and autos were down by 22.4%, 45%, 18%, 43%, and 15% respectively month-on-month in July. Furthermore, China quit publishing the unemployment rate for the 16-24 age group when it topped 21% in June, raising fears that it is much higher than that, further slowing consumer spending.
China bought another 35 cargos or so of soybeans last week from both Brazil and the United States. Brazilian offers converged with U.S. offers once again, leading to a shift back to Brazilian sourcing. Chinese buyers have already bought 2 million metric tons more soybeans for October loading in Brazil than they did last year, meaning less U.S. demand during its peak export season. This combines with a surge in U.S. crop ratings, particularly for soybeans, to add selling pressure to today’s risk-off environment. My yield model is now at 177.25 and 51.1 bushels per acre for corn and soybeans respectively, but remember my warning earlier this summer that I felt this would be the type of year when my confidence in the model would be lower – crops look better than they actually yield.
