August 3 – Stock futures continued to come under pressure overnight, as Treasury yields continue to rise on the Fitch downgrade of U.S. credit. The VIX rose above 17 to its highest level since June 1st overnight, and it continues to trade near that level this morning. The dollar index is currently trading near 102.7, after probing to fresh nearly four-week highs earlier in the session. Yields on 10-year Treasuries are trading near 4.18% this morning, which represents their highest level in nearly nine months, while yields on 2-year Treasuries are trading near 4.91%. Crude oil prices are bouncing this morning following yesterday’s “risk-off” collapse, with prices currently trading 1% higher on the day. Grain and oilseed prices are mixed in early trade.
First-time claims for unemployment benefits firmed to 227K in the week ending July 29, up from 221K the previous week, and above analyst expectations of 225K claims, but still at low levels. This allowed the four-week moving average to fall to 228.25K claims. Continuing claims for the week ending July 22 rose 21K to 1.700 million, while the four-week moving average fell by 4,500 to 1.712 million claims. On a related note, the Challenger job-cut report showed corporate layoff intentions at 23,697 employees in July, down from 40,709 reported in June and a low number. These numbers combined reflect a tight labor market ahead of tomorrow’s highly anticipated monthly jobs report, that is expected to show that the economy created 200K jobs last month, while the unemployment rate remained at a very tight 3.6%.
Nonfarm productivity rose at an annualized rate of 3.7% in the second quarter, which was nearly triple the 1.3% expected by analysts. Furthermore, productivity for the first quarter was revised to -1.2%, up from the -2.1% originally reported. Productivity tends to increase when workers are worried about keeping their jobs, whereas it tends to fall when they feel that they are in charge of the job market. Productivity can also be enhanced by technology advancements. Unit labor costs tend to fall when productivity increases, and that happened as well. Unit labor costs rose at an annualized rate of 1.6% in the second quarter, down from analyst expectations of 2.6%. First quarter costs were lowered to 3.3% from the 4.2% originally reported. These numbers partially answer why we’ve seen some easing of wage inflation despite an ongoing tight labor market.
Yields on 10-year Treasuries continue to rise, reaching nearly nine-month highs overnight, while also narrowing the inverse with 2-year yields. The rise in 10-year yields reflects the mounting concerns in the market regarding our nation’s debt problem, compounded by a feared rotation of Japanese investors out of the U.S. market back to their own securities, reducing the number of buyers of U.S. debt certificates at a time when our nation’s debt is rapidly growing. In fact, our nation’s national debt has grown by $1.8 trillion in the past two months. Now consider that the Federal Reserve is reducing its pace of purchases of debt instruments by $1.14 trillion per year. The primary way to find new buyers for these debt certificates is through higher yields. That then directly impacts mortgage rates on homes and rates on other consumer debts. This is how monetary policy, fiscal spending and credit rating changes all come together to negatively impact the average consumer’s pocketbook, as well as the economic outlook for the country. I expect this issue to really explode in about 15 months – immediately after the next election.
The Kerch Strait between Russia and Crimea serves as a vital passage of Russian crude oil and wheat to the export market, including nearly 40% of its wheat shipments, with dozens of ships passing under the Kerch bridge every week. This is the bridge that has periodically come under attack by Ukrainian forces, as it serves as a conduit for Russia to transfer military support resources to the war in southern Ukraine. Those attacks stepped up following Russia’s pullout from the Black Sea Grain Initiative and its subsequent attack on Ukraine export infrastructure. That raises security concerns for the Strait. As such, shippers report that the Strait is closed to traffic at night, with all movement restricted to daytime hours, reflecting the elevated security concerns. The markets are telling us that the world is currently coping fine with the loss of Ukraine grain – at least for now. But anything that might shut down movement of Russian exports would be a game-changer for the world balance sheets. The risk of such may be low, but the implications would be massive.
StoneX’s August customer survey revealed expectations that this year’s corn crop will produce 15.274 billion bushels on a yield of 177.0 bushels per acre, which is where I put the yield on my balance sheet a month ago. Using USDA’s demand numbers, that would leave ending stocks at 2.216 billion bushels in the ‘23/24 marketing year, which would be a 15.3% stocks-to-use ratio. My demand estimates would push ending stocks to 2.526 billion or a 17.8% ratio. Our customers put the soybean crop at 4.173 billion bushels on a yield of 50.5 bushels per acre. That would be expected to drop ending stocks to 177 million bushels, or 4.2% of expected usage. Unlike corn, that would be very tight stocks over the coming year. Corn and soybean fundamentals are going in different directions due to acreage and demand trends.
