July 14 – Stock futures came under modest pressure overnight responding to more key U.S. trading partners being added to President Trump’s reciprocal tariff list to go into effect on August 1. Yet, traders must also digest that news in light of a significant uptick in economic data this week, with earnings season beginning, along with inflation and retail sales data. The VIX is trading above 17 this morning, while the dollar index is trading near 98.0. Yields on 10-year Treasuries are trading near 4.43%, while yields on 2-year Treasuries are trading near 3.89%. Crude oil prices are modestly higher on surprising demand and tightening inventories, along with the Canadian tariffs, while the grain and oilseed sector found support from value buyers responding to the recent sharp decline in prices.
The list of countries receiving tariff letters from President Trump grew on Saturday, with the European Union and Mexico both receiving notification of intent to place 30% tariffs on them on August 1 if no trade agreement is reached prior to that date. These two entities are among our largest trading partners, and both have indicated an interest in negotiating an agreement to avert the tariffs by the end of this month. Mexico’s President Sheinbaum has done a particularly good job of avoiding public criticism of the president, while also stating that she looks forward to negotiating with President Trump while also protecting Mexico’s sovereign interests. Some 23 other countries also received letters over the past week, placing their tariffs at 20 – 50%, while also placing a 50% tariff on imported copper that is essential for the electronics industry. It’s interesting to note that Mexico’s 30% tariff is lower than Canada’s 35%, although letters to both indicated that Trump’s frustration with the flow of fentanyl into the States contributed to their tariff rates. I should note that I currently see nothing to indicate that goods covered under the USMCA trade agreement will be directly impacted by the tariffs. That exemption is expected to continue. The question, whether any of the countries that received letters will retaliate, and if so, what will that retaliation look like?
Negotiations continue with many of the countries that received letters, but it remains to be seen how many of them will be able to reach a deal with President Trump prior to August 1, so the uncertainty continues. That uncertainty led to the collapse of many equity and commodity markets in April, although the response thus far in July has been rather tame in comparison. The markets have become somewhat desensitized to the steady flow of headlines, similar to what happened after Russia invaded Ukraine in 2022. The market initially prices in a worst-case scenario, and then gradually calms down when that worst case no longer appears likely. That doesn’t mean that we can’t return to that level of volatility, but it does suggest that the investment world adjusts to adversity. That said, this week’s earnings reports will contribute a great deal of clarity on how the economy is or is not adjusting, along with the inflation and retail sales data.
U.S. Secretary of State Rubio expressed hope that a face-to-face meeting between President Donald Trump and Chinese President Xi Jinping might be possible soon. He made the statement after what was described as a “good” meeting with China’s Foreign Minister Wang Yi on Friday. Nvidia CEO Jensen Huang is also expected to visit Beijing this week, after recently talking to President Trump. The differences between Washington and Beijing remain large, but talk is good – certainly better than not talking. Even so, China continues to move forward with the establishment of an ASEAN free trade zone that would better integrate China’s industrial sector with other countries in the region to establish a greater unity and dependency. Those relationships may be tested by the trade agreements that President Trump seeks to get with those countries that seek to isolate China.
USDA raised its corn and soybean export estimates for the current marketing year on Friday, but it also reduced feed usage for corn and residual use for soybeans. The agency did increase soybean crush for the new marketing year to reflect strong the Administration’s apparent strong support for the nation’s biofuel program. The net result saw new-crop corn ending stocks cut by 90 million to 1.660 billion bushels, while new-crop soybean ending stocks rose by 15 million to 310 million bushels as exports were dropped for the coming year on larger South American supplies. Both markets saw futures prices come under pressure following the report, as traders focused on the potential for large crops this year that could still see surplus supplies rise. Strong condition scores continue to push yield models higher for both corn and soybeans – especially for corn. I should note that I’m hearing some anecdotal reports of pollination issues in those areas of the southern Corn Belt that have already pollinated, with these reports moving north with the pollination. It’s too early to know yet how widespread they are, but the reports that I’m seeing raise some questions, since the weather has largely been cooperative this year. This matters a bit more since the speculative funds hold sizeable short (sold) positions, so it’s something we need to monitor. Otherwise, the crop continues to look quite good overall, which will likely be reflected in this afternoon’s crop ratings once again.
