August 8 – Stock futures again pointed higher this morning, just as they did yesterday morning. Today’s strength followed the release of the weekly jobless numbers. Yesterday’s gains disappeared, resulting in a negative finish for the day, when Treasury yields pushed higher raising concerns of higher rates. Rates also pushed higher this morning when the weekly jobless claim data was released, so we again watch to see how much stability this market can show following the recent liquidation phase? The VIX is trading near 26 this morning, falling lower after the release of the weekly jobless numbers, while the dollar index is trading near 103.4, after following Treasury yields higher. Yields on 10-year Treasuries are trading near 4.00%, while yields on 2-year Treasuries are trading near 4.07%. Crude oil prices are modestly higher in early trade as the market continues to monitor developments in the Middle East, while the grain and oilseed markets traded mostly firmer as well.
First-time claims for unemployment benefits fell to 233K in the week ending August 3, down from 250K the previous week, and below expectations of 240K claims. The four-week moving average rose slightly to 240.75K, up from 238.25K the previous week. Continuing claims for the week ending July 27 totaled 1.875 million, which is up 6,000 from the previous week, after the previous week was revised lower by 8,000. Nonetheless, this still makes the continuing claims number the highest since November 27, 2021. The four-week moving average for continuing claims rose to 1.862 million, up by 7,000 from the previous week. Overall, today’s numbers reflect a jobs market that sees an elevated number of people filing for unemployment benefits versus a month or two ago, but the numbers don’t reflect any imminent problems in the jobs sector, but rather a mild softening of the outlook. They certainly do not justify the panic selling we saw on Wall Street over the past week, although we’ve previously discussed that rout had other origins to it. Overall, this has been a low-data week for the markets, with very few economic reports released. That’s somewhat unfortunate, as it has allowed emotions to play a larger part in market activity.
The rapid rebound in Treasury yields following the recent rout in the stock market is noteworthy. The yen carry trade unwind means that we anticipate seeing less demand for U.S. debt certificates from Japanese investors going forward. That decreased demand comes at a time when the year-on-year increase in the supply of debt certificates is at record levels as Congress finds itself borrowing money just to service its debt – pay interest expenses. The annual cost of servicing our debt is steadily climbing, currently estimated to be $913 billion. We currently spend about $915 billion per year on national defense and all of the various war / conflict regions that we’re involved with, including Ukraine, Israel and Taiwan, among others. The cost of servicing our debt is expected to surpass what we spend on national defense at some point over the coming weekend as it continues to trend higher.
That’s unsustainable. We currently spend an estimated $1.797 trillion on Medicare / Medicaid, $1.461 trillion on Social Security, $915 billion on Defense, and $913 billion on servicing our debt each year. Combined, that totals $5.086 trillion on these non-discretionary budget items, which exceeds annual tax revenues of $4.981 trillion. So, we’re already at an annual deficit, and we haven’t even paid yet for Homeland Security, or the multiple discretionary funding programs, such as farm programs, food programs, education programs, etc. The money that we used to spend on the discretionary programs is now going toward servicing our debt, so that we must borrow money to sustain these other programs. A reduction in Japanese buying of these debt certificates was initially covered up by a rush to safety amid the Wall Street rout as equity money shifted to the Treasury market while we assessed what was happening. But the restoration of calm, at least for now, has exposed the softer demand for Treasuries, resulting in a poor auction performance on Wednesday, as yields rose to attract new demand for those Treasuries. That’s what I’ve been warning about since last fall, illustrating the risk of higher mid- and longer-term rates.
The question is, will there be a time when managed money sees the commodities as under-valued relative to equities? I believe that day may come, particularly as we see the above continue to unfold. But near-term, the market must still deal with the size of this year’s corn and soybean crops. A USDA-NASS satellite study revealed that just 70K acres of corn and 46K acres of soybeans were lost to flooding in the northwestern Midwest in the record rains of June. Whether you agree with the numbers or not, those are the numbers that we can expect USDA to reduce harvested acreage for that specific area. As for yield, August continues to look very mild for the Midwest. Out of curiosity, we looked back at the top seven years in the past three decades that saw the highest yields above trend. Averaging the percent that they were above trend, and then applying that to this year’s trend, it suggested that we have the potential to push this crop to 193.7 bushels per acre, if August weather continues to favor good grain fill conditions. That’s NOT a prediction at this point, but it does show the potential.
