July 14 – Stock futures have a positive tone to them to close out the week, supported by strong earnings reports from several top lenders this morning. The VIX is trading just below 14 this morning, reflecting the optimism on Wall Street, while the dollar index is trading near 99.9, after briefly probing to fresh 14-month lows earlier this morning. Yields on 10-year Treasuries are trading near 3.78%, while yields on 2-year Treasuries are trading near 4.67%. Crude oil prices are mixed to weaker in early trade, consolidating just below the 200-day moving average, where they posted a fresh two-month high on Thursday. The grain and oilseed markets were mostly firm to higher overnight, with the broader commodity sector finding some tailwinds behind renewed optimism about the economy this week, combined with accelerated weakness in the U.S. dollar.
JPMorgan reported a 67% jump in profits in the second quarter, benefiting from higher interest rates being paid by its borrowers. Analysts noted that consumer banking was particularly strong in the second quarter, with investment banking starting to show signs of life as well. Citigroup also reported better-than-expected earnings in the second quarter, supported by gains in its personal banking and wealth management sector. Wells Fargo also reported a 57% rise in earnings during the quarter. The above is certainly good news for the banking sector, but it also raises red flags for Federal Reserve members who are concerned about a strong economy at a time when they’re trying to bring inflation back down to the 2% level. So, while stocks continue to make new highs for the move, gains are capped by questions about how the Fed will respond to this resiliency.
Fed fund futures priced in 95% odds of another 25-basis-point rate hike from the Fed later this month, but it has only priced in 28% odds of an additional rate hike beyond that, amid market expectations that the Fed will start cutting rates by the first quarter of next year. That’s not likely to occur, in my opinion, until Fed members see greater signs of cooling in the employment sector and easing of upward price pressure for housing. Shelter costs have been trending lower, but the housing market is heating up again as consumer confidence returns. President Biden used his executive pen to erase $39 billion in student load debt this morning, which will also provide stimulus, perhaps encouraging more lenders to look to the housing market. The problem is there’s still a real shortage of houses available on the market. Housing data shows that roughly 80% of home loans were financed or refinanced at very low rates over the past five years, providing little incentive to move. In fact, the data suggests that 61% of those loans are locked in below 4%, with 23% below 3%.
China’s aviation sector is showing signs of improvement, which should prove good for energy consumption. Freight movement via air recovered to 85% of pre-pandemic levels in the first half of this year, while passenger traffic reached 88% and cargo and mail reached 93% of 2019 levels. However, the recovery in international flights has been very slow, remaining at less than a third of 2019 levels. Nonetheless, international flights should see a more significant boost in the third quarter as summer tourism travel kicks in. Today’s edition of China Direct, published by our Shanghai office, notes that some domestic tourist sites are seeing 20 – 30% higher tourism numbers than 2019. But the news is less optimistic elsewhere, with domestic electricity consumption data continuing to reflect a slowing economy. Social electricity consumption rose just 3.9% in June above last year’s lockdown levels, which was the slowest growth rate in five months. Electricity consumed in industrial production and manufacturing rose just 2.3% from last year’s low levels, while service sector electricity use grew by 10.1% year-on-year. But even there, service sector growth is slowing from the nearly 21% growth seen in May. Slower export volume to the United States and Europe as they decouple from China is a big part of the problem. Germany just released its long-waited China strategy, reflecting desires to focus more on domestic production. Furthermore, China’s microchip imports used in the production of products fell 22.4% in the first half of this year due to U.S. sanctions. Yet, China’s growing public debt problem limits its ability to stimulate the economy.
Tailwinds continue to support the commodity sector as the dollar sinks and the U.S. economy recovers. Soybeans are the leader fundamentally for the grain and oilseed sector, with their balance sheet showing little to no margin for weather-related production issues this year. Meanwhile, the Minneapolis and Kansas City wheat markets are focused on deteriorating conditions of the spring wheat crops in the U.S. Northern Plains, Canadian Prairies, and in Russia due to dry weather. Chicago wheat and corn prices are simply along for the ride.
