Perspective: Morning Commentary for December 29

By: Arlan Suderman, Chief Commodities Economist

Wed, 29 Dec 2021, 13:57

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 29 – Stock futures were quietly mixed overnight, while the commodity sector came under pressure. Omicron numbers are still exploding higher, but the economy continues to roll. Flight cancellations due to weather and Omicron continue to be high, but Wall Street currently believes that the new variant will blow through the population in quick order to set us up solid growth in 2022. The Santa Claus rally continues. The VIX is trading below 18 as it continues to set fresh five-week lows amid waning Omicron fears. The dollar index is again trading near 96.1, remaining well within the trading range that has contained it over the past month. Yields on 10-year Treasuries broke through overhead resistance near 1.50% to trade near 1.52% at this hour. Crude oil prices are modestly lower as travel problems reduce energy consumption, while the Ags were mostly lower overnight as well. The Ags tried to push higher on last night’s opening, but buyers were few and far between.

FlightAware reports that 757 U.S. flights have already been cancelled this morning, which is very close to where we started yesterday as well. Another 795 flights have been delayed thus far, but more can be expected through the day today. A few of them are weather related, but most are the product of staff calling in sick as Omicron spreads through the population. The CDC reduced the quarantine requirement, but that hasn’t reduced the number of sick calls thus far. Perhaps that will change once we get past the holidays.

The Centers for Disease Control reported a record high 441,278 positive Covid tests on Monday, the latest date for which data was available today. The previous record had been 294,015 positive tests on January 8^th of this year. It’s possible that Monday’s number was elevated due to tests piling up over the three-day holiday weekend, so let’s look at the seven-day moving average. It rose to 240,408 on Monday, up from 219,027 the previous day, although it is still below the record 250,437 posted for the average on January 11^th of this year. Keep in mind that this merely represents the results reported to the CDC, and it does not include all the at-home tests currently available that do not get reported.

I’ll go back to what I said in this column in early February 2020 about fear being the greatest risk to the economy from Covid-19. Fear perhaps peaked in March and April of last year, and then it has been on a roller coaster since that point. There have been many peaks along the way, but those peaks of fear have trended lower as we’ve learned more about how to live with Covid. There is still much that we do not know about the long-term effects of Covid, but America is tired of living in fear, and it has chosen to manage the disease rather than to hide from it. We’ve come to realize that Covid is not likely to go away, so let’s see how to live with it the best we can. That’s a big reason why the economy continues to roll, boosted by trillions of dollars of fiscal and monetary stimulus still in the system. The Fed will need to decide at some point if the economy can continue to roll without that stimulus, which would mean starting to shrink its balance sheet. That could prove to be a challenge.

China reported 152 new locally transmitted Covid cases yesterday, including 151 new cases in Shannxi – all of which were in the capital city of Xi’an. Shaanxi province has had nearly 1K (997) new cases in the past two weeks. Most of those have been in Xi’an. Strict lockdowns continue for a seventh day in Xi’an as the government tries to isolate cases and to stop the spread of Covid, which has primarily been the Delta variant to this point. The Omicron variant is expected to provide China with even greater challenges ahead of hosting the winter Olympics in February. Authorities are reportedly setting up buffer zones in border cities to battle imported cases of Covid-19. In theory, life (and economic activity) should be able to continue as normal within the buffer zones, although residents would not be able to leave the zones unless absolutely necessary. Special requirements would be put on those that do leave and wish to return. Fewer restrictions would be seen for non-buffer zone areas. It’s believed this would allow for faster restoration of economic activity following an outbreak, although it would move the entry point further inland.

End of the calendar year, thinner holiday trade, and portfolio rebalancing are all taking their toll on the commodity sector this morning. That doesn’t mean that we can’t see some positive gains at times, but gains have been more difficult to hold in recent days due to the above factors. Official rebalancing of portfolios typically takes place in the 5^th to the 9^th trading day of January, but many people try to get out ahead of the expected action to do their work. Trade volume should increase next week, but we’ll be dealing with the rebalancing the next two weeks.

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