December 21 – Stock futures pointed upward this morning following release of economic data that traders interpret as supportive of a pivot by the Federal Reserve. That allowed the VIX is trading above 13 this morning, after spiking to a three-week high near 14 yesterday as stocks reversed lower during the session. The dollar index is notably lower this morning as Treasury yields pull back, trading near 101.9. Yields on 10-year Treasuries are trading near 3.83, marking a new nearly five-month low, while yields on 2-year Treasuries are trading near 4.30%. Crude oil prices are more than 1% lower on supply builds, while the grain and oilseed sector is again mixed. The markets are slipping into a holiday mode as we approach the weekend. They will be closed on Monday for Christmas before an anticipated thinly-traded short week next week ahead of the New Year’s break – a time when the news flow tends to be thin and market participants largely absent.
First-time claims for unemployment benefits rose slightly to 205K in the week ending December 16, up from 203K the previous week, but below analyst expectations of 210K claims. That dropped the four-week moving average to 212K claims, down from 213.5K the previous week. Continuing claims for the week ending December 9 slipped to 1.865 million, down 1K from the previous week. The four-week moving average rose by 6K to 1.878 million claims. Continuing claims have been slowly trending higher, but they still remain at historically low levels, as do the weekly claim numbers, reflecting a labor market that’s still fairly tight.
Gross domestic product rose at an annualized rate of 4.9% in the third quarter, according to today’s revised data for the quarter. That’s a downward adjustment from 5.2% GDP growth in the third quarter, as was previously reported, although the numbers still show pretty solid growth. Personal consumption expenditures rose at an annualized rate of 3.1% in the third quarter, which represents a downward revision from 3.6% that was previously reported. These are still solid numbers, although traders interpreted them as moving in the right direction to support a Fed pivot. The Philadelphia Fed manufacturing index also showed contraction this month, fueling that sentiment of a slowing economy to support a Fed pivot. It comes down to the old “glass half full or glass half empty” debate, and Wall Street is currently choosing to read every economic report as supportive of a Fed pivot. Perception is reality to the markets, and we’re seeing that play out until something changes perceptions.
Is OPEC+ losing its grip on the crude oil market? We saw signs of this earlier this month when the cartel delayed its scheduled meeting in order to negotiate something that its members could live with before going public. There’s a growing sense that some members are dissatisfied with the current state of affairs – lower output combined with lower prices. The temptation is to increase output to increase total revenues – to cheat the cartel agreement. Saudi Arabia has bore the bulk of the weight of recent cuts, and it seems to be growing impatient with other members. It was able to get an agreement for cuts for January, but Angola then withdrew from OPEC in protest. Angola is not a major producer at 1.13 million barrels per day, but its departure may reflect problems within the cartel that could lead other members to either cheat or depart as well, risking a greater flood of supplies in the coming months.
Scattered rains continue to narrow areas of stress in Center-West Brazil, although forecasters think that up to a quarter of Brazil’s soybean belt may miss out on rains with the current system. Commodity Weather Group expects 70% of Brazil’s soybean belt to receive 0.50” to 1.50”, locally 5.50”, over the next five days, with rains beyond that in the 6- to 10-day period. Even wetter trends continue to show up in the 11- to 15-day guidance, although the models don’t have a good track record this year of moving those rains forward. For perspective, consider the Midwest in mid-August waiting for rains. The stakes are high. I still believe that we’ll see production estimates trend lower going forward, but the extent of those losses will be the key to whether the market needs to ration U.S. demand with higher prices. So far, we haven’t seen evidence to suggest that such rationing will be necessary, but prices continue to find support beneath them because the risk of more significant losses remains. We should get many of those questions answered over the next several weeks, just as we would get similar answers for the U.S. crop in late August and early September. The problem for Brazil farmers facing drought conditions is that yield potential is high in Argentina, where it could see production double this year to 50 million metric tons, with increases in Paraguay and Uruguay as well. Those three countries alone could offset a dozen mmt of soybean exports or more lost by production problems in Brazil.
