December 20 – Stock futures drifted modestly lower overnight, as the rate cut euphoria cools on Wall Street, and the holiday malaise settles in. The VIX continues to trade near 12 this morning, remaining at historically low levels, reflecting relative calm on Wall Street. The dollar index is trading near 102.2, even as Treasury yields slip to new lows. Yields on 10-year Treasuries are trading near 3.88% this morning, which is its lowest level since late July, while yields on 2-year Treasuries are trading near 4.38%. Crude oil prices rose above $75 to trade at their highest level since December 1st, while the grain and oilseed markets were mixed.
Stocks are setting record highs based on expectations of lower interest rates from the Federal Reserve. The rise in stocks, combined with a sharp drop in interest rates and gasoline prices, gives lift to consumer sentiment. We should get updated data on consumer confidence later this morning, but I assume that it will show a pop in confidence. We’ve already seen a spike in housing activity as a result, and we can anticipate a surge in other consumer buying as well. Those factors will only add to the stickiest portions of inflation going forward – shelter and wages. That’s why I’m still expecting a rebound of inflation in 2024 that will make those big anticipated rate cuts difficult in the near-term, especially when combined with the surge in the supply of debt certificates being offered onto the markets in 2024, creating even more challenges for the Federal Reserve trying to hit the 2% mandate.
Tensions remain high in the Middle East, with the leader of Hamas making a visit to Egypt, seeking help in negotiating another ceasefire. But the commodity markets are primarily focused on Houthi Rebel attacks on civilian ships in the Red Sea, as this Iran-backed group demonstrates its support for Hamas in the Gaza Strip. A number of shipping companies are choosing to avoid travel through the Suez Canal and the Red Sea until their safety can be guaranteed, and that’s not likely to happen for some time. The United States is actively working to set up a coalition of nations who would provide escort for ships, but I still do not see anything near-term that’s going to lend sufficient confidence to shippers. Many nations simply do not want to get involved in engaging the Houthis. Unfortunately, Somalian pirates are also taking advantage of the situation, striking ships who are parked in the Red Sea while waiting for assurance of safe passage, adding to the problems in the region.
Rerouting cargoes around the southern tip of Africa does not create a shortage of commodities or goods long-term. It does lengthen transit times, while adding to transit expenses as well. As such, it creates a short-term tightening of supplies, which eventually even out as the supply chain adjusts to the longer transit times. However, it does increase the costs of the commodities and goods that are delivered. That adds an element to inflationary pressures, while also increasing uncertainty in the supply chains. The problems of course are not limited to the Red Sea. They’re amplified by problems with low water levels in the Panama Canal that are redirecting cargoes through the Suez Canal and the Red Sea. The other critical area of concern continues to be the Black Sea, particularly if Ukraine would garner both the military capability and the desire to disrupt shipments coming from Russia. The bottom line is that the supply of commodities is not currently the concern so much as shipping logistics, and changes in those logistic risks are raising costs.
The forecast is slightly wetter this morning for Center-West Brazil, after seeing slightly more rain than expected yesterday. We’ll still see a quarter of the soybean belt miss out on rains near-term though. The longer-term outlook remains quite wet, but market participants remain somewhat skeptical, considering the wet bias that models have held for much of the growing season to this point. The uncertainty of whether the forecasts will finally verify provides underlying support for the soybean market, but the trade still needs to see hard evidence that production losses will expand sufficiently to notably increase U.S. exports. The only reason to justify a sustained rally in Chicago soybean futures would be if the weather problems in Brazil tighten U.S. supplies enough to justify rationing demand with higher prices. We’ll get another round of production estimates released around the turn of the calendar, including an updated StoneX customer survey-based production estimate on January 2nd. Some local production estimates are dipping into the mid-150s MMT of production, but that’s still not enough to notably boost U.S. soybean exports. Traders need to see a significant move to the downside in those production estimates to keep Brazil weather as a focus, especially with Argentine production expected to double this year. Longer-term, the risks are greater for Brazil’s winter corn crop, although that balance sheet has more room to absorb an increase in demand.
