August 16 – Stock futures were mixed to weaker in overnight trade as Wall Street focuses on the anticipated release of the minutes of the latest Federal Reserve meeting this afternoon. The VIX is trading near 16 in early activity this morning, while the dollar index is trading near 103.2, placing it just below the pivotal 200-day moving average near 103.3. Yields on 10-year Treasuries are trading near 4.22% this morning, while yields on 2-year Treasuries are trading near 4.93%. Crude oil prices are modestly higher as they rebound from yesterday’s sharp losses, while the grain and oilseed markets bounce on another Russian strike on Ukraine export infrastructure and a return to a hotter drier weather pattern for the Midwest in the second half of August.
U.S. housing starts rose to an annualized rate of 1.452 million units in July, essentially matching analyst expectations of 1.455 million. However, the June data was revised lower to 1.398 million, down from the 1.434 million units originally reported. New permits for housing starts came in at an annualized rate of 1.442 million in July, which is essentially unchanged on the month, although a bit below analyst expectations of 1.464 million. The housing sector continues to struggle under the current high-interest rate environment, particularly with 10-year Treasuries trending higher recently. Yields on 2-year Treasuries have essentially been chopping sideways just below 5% over the past couple of months, albeit with a bit of an upward bias. However, yields on 10-year Treasuries are clearly trending higher, continuing a trend in place since May. This reflects a marketplace that is slowly coming to take the Federal Reserve at its word, that it intends to follow a “higher for longer” sentiment toward interest rates. However, I believe that it also reflects slowly growing concerns over recent U.S. and bank credit rating downgrades that may be a larger factor down the road.
Another property firm defaults in China, creating more fault lines for China’s economy. Sino-Ocean Group reportedly defaulted on interest payments on bonds following an anticipated loss of as much as $2.7 billion in the first half of this year. This follows reports of defaults by property giant Country Garden last week. China’s new home prices in 70 major cities fell 0.1% year-on-year in July, after being flat in June. Property sales in China are down 6.5% year-on-year, with little sign of a recovery at this point. The property sector accounts for a fifth of China’s gross domestic product, amplifying the impact it has on consumer sentiment. It seems that each day brings more evidence of fractures in China’s economy. I do not believe that its economy is on the cusp of collapse, but the current direction is concerning. Furthermore, leaders tend to focus more on outside “enemies” during times of economic turmoil to distract their citizens from the issues at home. As such, China’s Minister of National Defense will travel to Moscow this week to meet with military leaders from Russia and Belarus to strengthen plans to counter the West. In response, leaders from Japan and South Korea will meet with the officials from the United States to discuss defense plans for the western Pacific. Media reports suggest that they will be announcing plans for expanded cooperation on ballistic missile defense systems, and possibly specific measures to defend Taiwan that would further anger China.
Russian drones attacked grain facilities at the Ukrainian river port of Reni on the Danube River overnight, raising concerns again of tightening supplies of food grains on the world market. Ukraine’s ports on the Danube accounted for a quarter of Ukraine’s grain exports prior to the end of the Black Sea Grain Initiative, but they have since become the primary option for exporting grain. However, Russia appears bent on preventing that from being the case. Russia is essentially implementing a de facto blockade of Ukraine to prevent it from exporting food grains via water routes. Latvia stated this week that they could begin exports of Ukraine grain this fall, with volumes approaching 1 million metric tons per month. However, the grain would still have to be shipped through Poland, which has different rail gauges than either Latvia or Ukraine, adding to logistic complications and higher costs. However, the primary question for grain traders today is, how will Ukraine respond to this latest attack on its ports? It has previously vowed to respond to each attack with a similar counterattack on Russia’s export capability, which it has already backed up with a previous attack on Russia’s port at Novo. What will be Ukraine’s response this time?
High pressure is expected to expand across much of the Midwest over the next couple of weeks, heating up the region, while keeping storms to fringe areas of the Ag Belt as crops finish out the 2023 growing season. The annual Pro Farmer Midwest crop tour is scheduled for next week, which will see industry representatives systematically traverse across the Midwest to give traders their best “view” of this year’s crops to date.
