December 16 – Stock futures had a positive tone to start “Fed” week. The Federal Open Market Committee will meet on Tuesday and Wednesday of this week to discuss potential changes to the Fed’s monetary policy, which is expected to be the primary focus in the days ahead. The VIX is trading just above 14 this morning, reflecting slightly elevated nerves ahead of the Fed meeting, while the dollar index consolidates near 106.9. Yields on 10-year Treasuries pulled back a bit from Friday’s three-week highs to trade near 4.38%, while yields on 2-year Treasuries are trading near 4.23%. Crude oil prices pulled back from last week’s rally, as Chinese consumer data disappoints, while the grain and oilseed sector was mostly higher overnight, with the exception of weaker edible oil prices.
Japan’s central bank sees more rate hikes ahead that will pull money home, and likely out of the U.S. Treasury market, while Europe’s central bank sees more rate cuts ahead, which leaves more upside risks for the U.S. dollar, depending on what the Federal Reserve does going forward. Last week’s U.S. inflation data came in hotter than expected, even as the economy continues to show greater resiliency than expected. The Fed wants to get its benchmark interest rate back down to “neutral” while admitting that it doesn’t know what that level is in today’s economy. The Federal Reserve is designed to operate independent of politics, but the reality is that the president appoints members of the Federal Open Market Committee, and he’s made it clear that he’s not a fan of Jerome Powell. Humanly speaking, that has to play a part in the decision-making process, knowing that Trump wants lower interest rates. Policymakers expect the Trump Administration to cut taxes and regulation, which is stimulatory, while also using tariffs as a negotiating tool. The combination can add to inflationary pressures that are already showing a stubbornness toward dropping to the Fed’s 2% mandated level. The discussions inside the board room will likely be robust. Public comments made by policymakers in recent weeks suggest that the group is far from a consensus, even though Powell likes to see unanimous decisions. Wall Street is leaning hard toward a rate cut this week, but also settling on the reality that we may see just one more cut over the coming six months.
Retail sales increased by just 3% year-on-year in China in November, down from 4.8% growth in October, and below analyst expectations of 4.6% growth. Those sectors benefiting from government stimulus measures saw strong sales growth in November, but that did not carry through to areas not receiving stimulus support. For example, home appliance sales surged by 22.2% year-on-year in November, while furniture jumped 10.5%, and auto sales rose 6.6%. However, retail sales overall, excluding auto sales, rose just 2.5%, which is down from the 3.7% average for January to November. This leads to questions over the effectiveness of China’s stimulus programs going forward in 2025 in actually turning consumer sentiment. Bank loans increased by 580 billion yuan ($80 billion) in November, which is nearly half of the 1.09 trillion yuan in loads serviced the previous year, reflecting a lack of interest in business and consumer expansion. Household medium to long-term loans increased by 300 billion yuan ($41 billion), up 28.7% on the year, following a 56% increase in October, signifying a positive pick up in housing demand due to recent stimulus programs. However, business loans dropped by nearly 53% year-on-year in November, following a nearly 56% drop in October, and that follows drops of 20% and 30% respectively a year ago. The bottom line is that stimulus programs are treating the symptoms in China’s ailing economy, but they are not effectively treating the disease, and so confidence in China’s recovery is slipping once again.
Managed money increased its net ownership of corn to its highest level in 22 months following last week’s USDA crop report surprises, and that was as of the end of trading on report day. It likely added to that in the days that followed, before taking some profits late week. That buying was met by farmer selling on both sides of the equator, limiting the rise in March futures to the 200-day moving average, which also matched up with the October 2nd high. Fund managers still lean to the short side with soybeans and wheat, although their expectations for reinflation pressures have thus far limited their willingness to fully commit to short positions. Last week’s cash movement likely met farmer cash flow needs ahead of the new tax year, unless we see an additional surprise rally in prices before then. Until then, sentiment will be shaped by monetary policy coming out of this week’s Fed meeting that shapes expectations of inflation and economic growth. Global corn fundamentals are not bullish, but we have seen much of the margin for error evaporate that would protect us against a weather problem with Brazil’s winter corn crop, or next year’s Midwest growing season. Wheat faces similar dynamics with uncertainty about next year’s Black Sea crop. Global soybean fundamentals look well supplied, with the primary questions being how the Trump Administration will shape liquid biofuel policy, and how long will it take it to do so? With a full agenda, that leaves my greatest concerns going forward being with the oilseed complex, especially with the big Brazilian harvest set to begin over the next few weeks.
