December 13 – Stock futures are higher to start the day, bolstered by favorable inflation data from the wholesale level released this morning, but traders remain cautious ahead of this afternoon’s policy update from the Federal Reserve. The VIX is trading near 12 this morning, after falling to nearly four-year lows on Tuesday. The dollar index is trading near 103.8 as it waits for direction from the Treasury market this afternoon. Yields on 10-year Treasuries are trading near 4.17% ahead of this afternoon’s Fed announcement, while yields on 2-year Treasuries are trading near 4.68%. Crude oil prices are modestly higher at this hour, after posting fresh five-month lows below $68 earlier in the session. The grain and oilseed sector is mostly lower this morning.
The producer price index was flat month-on-month in November, versus being down 0.5% in October, and versus analyst expectations that it would bounce 0.1% in November. The headline PPI was up just 0.9% year-on-year in November, down from 1.3% the previous month, and below analyst expectations of 1.0%. The core PPI that excludes the more volatile food and energy sectors was also flat month-on-month in November, matching what we saw in October, but down from analyst expectations that it would rise by 0.2%. Core PPI rose 2.0% year-on-year in November, which was down from 2.4% in October, and below analyst expectations of 2.2%. PPI minus food, energy, and trade services rose 0.1% month-on-month and 2.5% year-on-year. Wall Street will interpret today’s data as providing further support for a pivot by the Fed in early 2024, with Fed fund futures trading 50-50 odds again this morning of a March rate cut, and more than 80% odds of a cut by May.
Javier Milei promised change for Argentine voters, and he’s starting to deliver. Milei became president of Argentina on Sunday, and he wasted little time before starting to shake things up, with significant implications for the commodity sector. Argentina slashed the value of the peso by 54% to 800 pesos to the dollar late on Monday, while also slashing social programs. The soybean export tax will be 30% for now, with export taxes on other Ag commodities at 15%, with a promise to move toward significantly reducing or eliminating these taxes in the future. If successful, Milei’s reforms could build a powerhouse Ag exporter out of Argentina, but it will take a lot more than what he’s done thus far to accomplish that. Milei’s political party only has a third of the legislative branch. Getting elected on promises for reform is one thing. Getting those reforms through the legislative process as voters realize the personal impact of them is another. His administration is already warning that this week’s changes will lead to more pain before things start to get better. The sharply lower peso should encourage farmers to sell corn and wheat, although they have few soybeans to sell ahead of the new harvest, following last year’s drought-shortened crop. However, it will also lead to another surge in inflation, including higher costs for crop inputs. Argentina has massive dollar-denominated public debt, and few dollars in its reserves to make payments. Milei will need the people’s support to right the ship even as things get more painful for them. It’s yet to be seen whether he’ll maintain the people’s support through those painful changes.
Risk-off sentiment weighed on Chinese stocks today, reflecting investor disappointment in statements emerging from China’s two-day closed door economic conference, with the CSI-300 trading just above levels last seen in early 2019. Analysts note how government officials are full of promises, but weak on substance in righting the economic ship in China, with the annual economic work meeting failing to raise hopes of a change any time soon. S&P Global warned that China’s economic slowdown would continue to bring pressure on the heavily indebted local governments in China, adding further credit risk stress to China’s banks, local government financing platforms and real estate enterprise. It went on to warn that the current measures being implemented by the central government may not be enough to alleviate these pressures. A sluggish Chinese economy adds to the bearish sentiment in the global commodity markets.
Good rains are expected across Argentina’s grain belt in the days ahead, with 0.50” to 2.5”, locally 6.0”, expected across 90% of the region over the next five days alone. This should continue to set Argentina up for good yields and big crops when they harvest them in a few months. It’s a much different picture in Center-West and northeast Brazil, where rains continue to be below normal – considerably less in some locations. That pattern is expected to continue over the next 10 days, with heat expanding to increase stress on the northern third of Brazil’s crop belt. Week #2 rains are expected to cut that area of stress in half if they move forward to verify in the forecast. However, production losses have not yet fallen enough to justify rationing U.S. demand for soybeans with higher prices, and that continues to disappoint the bulls, particularly in light of expected increased output from Argentina in the coming year. However, prices continue to find a level of support beneath them due to the uncertainty that this weather pattern presents for a crop going into its pod set and pod fill stages.
