Perspective: Morning Commentary for January 14

By: Arlan Suderman, Chief Commodities Economist

Fri, 14 Jan 2022, 14:05

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

January 14 – Wall Street traders have their eyes on a three-day holiday weekend. The markets will be closed on Monday for Martin Luther King, Jr. Day, providing a bit of additional risk for traders carrying large positions through the period, especially in the Ags, which are currently trading changing forecasts for dry areas of South America. Stock futures came under pressure ahead of the holiday weekend, pushing the VIX back above 21 this morning, with a weak retail sales report adding to the negative tone. The dollar index found support at the 100-day moving average, after setting a fresh two-month low near 94.6 overnight, allowing it to bounce to 94.9. Yields on 10-year Treasuries continue to consolidate near 1.73%. Crude oil prices rallied to a fresh two-month high overnight, before selling pushed prices lower this morning, although they remain in the green. The Ags were mixed overnight, with the technical selling continuing for wheat, while corn and soybean prices reflect ever-shifting weather forecasts for dry areas of Argentina, Paraguay, and southern Brazil.

Retail sales fell 1.9% month-on-month in December as Omicron rapidly spread through the country. That compares to 0.2% gains in November, and to analyst expectations that sales would be flat in December. Retail sales minus vehicles were even worse at a decline of 2.3% month-on-month. That compares to a lowered 0.1% gain in November and to analyst expectations of 0.3% gains. Some of this may be explained due to consumers shifting their Christmas shopping forward to be sure that presents arrived ahead of the holidays amid supply chain problems, but some of this is also likely tied to Omicron slowing retail sales activity. We know that wage growth was strong in December, so perhaps the PCE data will show a surge in the savings rate. Nonetheless, this gives traders something to think about ahead of the holiday weekend. Consumer sentiment data comes out later this morning.

Omicron is the dominant variant of Covid-19 in the United States. It spreads easy and fast, allowing it to spread through the U.S. population at break-neck speed. This was the week that we hoped to start seeing signs of the outbreak peaking in the United States, based on the trajectory that it took in South Africa. There are signs of that occurring, but it is far too early to confirm such is true. The seven-day moving average for confirmed positive tests is still near 800K per day, and that doesn’t include the myriad of unreported at-home tests. Hospitalizations are rising due to the sheer volume of cases, reaching record high levels, although the bulk of those infected suffer primarily mild symptoms. The fear that came with previous outbreaks hasn’t gripped the nation as in the past, allowing the economy to continue to roll, albeit it with some significant challenges. One of those challenges has been the loss of workers, which was on full display in the thousands of cancelled flights each day, and in the slowdown of animal harvesting at meat packing plants, as well as elsewhere. The flight cancellations are already in decline, while the meat processor problems continue, although they show signs of plateauing this week. Nonetheless, these issues are expected to show up in the first-quarter economic data, but hopefully growth will return in the second half of the quarter to help offset some of the early-year problems.

The challenges continue for China. It reported 143 new locally transmitted Covid cases yesterday, including 98 in Henan, 34 in Tianjin, 8 in Shannxi, 2 in Shanghai and 1 in Guangdong. The focus is shifting to Tianjin and to Shanghai, with the end goal of keeping Beijing clean. Authorities struggled to find the initial case in Tianjin, allowing it to spread before they could isolate it. Tianjin is a major port city for containers used to export goods to Europe and to the United States. But their greater concern is the capital city of Beijing, which will host the Olympics next month. It is very close to Tianjin. Public transportation between the two cities has been halted. Several locally transmitted cases have also been confirmed in Shanghai that appeared to originate from a Chinese national returning to China from the United States. We do not have confirmation at this time that it was the Omicron variant, but that is the predominant variant in the States currently. The alleged initial case traveled through Shanghai, which may mean that many more cases will follow. Omicron is difficult to control. Back to Beijing, we will likely see that city continue to tighten its controls, possibly isolating it from much of the rest of the country in the days and weeks ahead as it prepares to host the Olympic Games. China simply cannot allow a large-scale outbreak in Beijing ahead of the Olympics, or even in the zone around the city. Rumors are flying of possible large lockdowns within China, although nothing is confirmed.

Argentine crop ratings continue to tumble amid record heat and drought. Its soybean crop is rated just 31% Good to Excellent this week, down from 88% four weeks ago. Its corn crop is rated 23% G/E, down from 87% four weeks ago. The crop production problems are also common in Uruguay, Paraguay and in southern Brazil. A couple of systems are expected to bring relief to this region of South America next week before the pattern reverts dry again. Next week’s rains will be pivotal for shaping the production outlook as we head into February, which is really the key month for much of this region. South American weather is expected to be the key driver of the grain and oilseed markets in the weeks ahead, followed by a shift to the U.S. growing season.

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