January 27 – The tech sector tumbled overnight on the surging popularity of a cheap Chinese alternative artificial intelligence model. The selling spilled over into other portions of the stock market as well, although losses were greatest for the tech sector. Traders were also taking note of a near-miss trade war over the weekend with one of our better Latin American customers. The VIX is currently trading near 22, after pushing to a five-week high just below 23 overnight, while the dollar index is trading at a five-week low near 107.1. Yields on 10-year Treasuries are trading near 4.53% after testing the 4.5% support level for the first time in five weeks, while yields on 2-year Treasuries are trading near 4.19%. Crude oil prices are modestly weaker once again this morning, while the grain and oilseed markets are mostly in the red as well due to widespread weekend rains in key production areas of South America, combined with the weekend trade spat.
The Chicago Fed national activity index is a composite of existing economic indicators constructed to equal zero when the economy is growing at a trend rate, with a standard deviation of one. The index came in at +0.15 for December, while the November number was revised to -0.01, up from the -0.12 originally reported. The three-month moving average rose to -0.13, up from-0.26 the previous month. That would suggest that the economy grew at a pace slightly above trend in December, after growing slower than trend in previous months. The Federal Reserve will take this and other data into consideration when it meets on Tuesday and Wednesday of this week to consider changes to its monetary policy. It is expected to pause its rate cut cycle. The markets are still hoping for a couple of more rate cuts this year, but that isn’t a given. Yields on 10-year Treasuries pulled back notably starting mid-month, but they’re still roughly 90 basis points higher than they were when the Fed started cutting.
A trade war was averted late Sunday evening. No, it wasn’t with China, or Canada, or Mexico, but rather with Columbia, which is our third largest trading partner in Latin America. The United States has a free trade agreement with Columbia that was signed in 2006 that generated $33.8 billion in two-way trade in 2023, the latest year for which data was available. Yet, that was all on the line for a period of time over the weekend. The United States was seeking to return illegal immigrants to Columbia on two U.S. military aircraft, which Columbia refused to allow to land. President Trump ordered that the paperwork be immediately drawn up to impose 25% tariffs on all goods coming from Columbia if it would not accept the immigrants, which would go up to 50% after one week. Columbia’s president then engaged in a spat over social media, indicating that he would place the same tariffs on U.S. goods flowing to his country. However, within hours cooler heads prevailed, and Columbia’s president agreed to allow for the return of the migrants, and President Trump decided not to sign the tariff paperwork. Columbia is our third largest customer for corn, importing 248 million bushels in calendar year 2024. It has purchased 159 million bushels thus far for the 2024-25 marketing year, up from 115 million bushels at this same point the previous year. The top importer of U.S. corn in 2024 was Mexico at 925 million bushels, followed by Japan at 449 million bushels.
The Chinese Lunar New Year celebration starts tomorrow, lasting through February 4th, although many people will take two weeks or more of time off to celebrate the annual holiday. This is expected to reduce the flow of news out of China, as well as reduce the scope of purchases that China makes during the holiday that triggers the largest annual migration of people in the world as they travel home to celebrate with family and friends. The presale of box office tickets is already at a new record high, and the government hopes that improved sentiment will also trigger a lot of spending by those celebrating the New Year. Unfortunately, the holiday is kicking off with some negative economic news. Data released today showed a return to contractionary conditions for China’s manufacturing sector in January, with non-manufacturing slowing to minimal growth levels as well.
Good rains fell across some dry areas of Argentina and southern Brazil over the weekend, providing much-needed relief for crops in the region. A third of Argentina remains under varying levels of dryness stress this morning, down from nearly two-thirds last week, but the pattern continues to slowly trend wetter. Commodity Weather Group notes this morning that most guidance now favors showers to limit yield threats in these dry areas of Argentina and southern Brazil as we move into February. There may still be notable yield losses in Argentina. It’s still relatively early in the growing season, and weather patterns can change. But it would be presumptive to say that there will be losses worthy of rationing demand with higher prices when Brazil’s soybean crop is largely made, and it is a big one. The U.S. farmer sold most of his 2024 soybean crop before the end of 2024, but he’s been an active seller of corn on this latest rally. As a result, it’s estimated that most processors and some feeders have their needs covered well into June after buying a massive quantity of corn this month.
