July 16 – Stock futures pushed higher this morning on better-than-expected retail sales data. The VIX is trading near 13 this morning, while the dollar index is trading firmer near 104.5 as it follows Treasury yields higher on the retail sales data. Yields on 10-year Treasuries are trading near 4.20%, while yields on 2-year Treasuries are trading near 4.46%, after just setting a fresh four-month low prior to the data release. Crude oil prices are notably lower this morning on concerns about demand tied to a soft Chinese economy, while grain and oilseed prices are generally consolidating after a big selloff on Monday.
Retail sales were flat in June, beating analyst expectations that they would be down by 0.3% month-on-month. Furthermore, May retail sales were revised to 0.3% growth, up from the 0.1% growth originally reported. But it gets better. Retail sales minus vehicles rose 0.4% month-on-month in June, beating expectations of 0.1% growth, and up from an upwardly revised 0.1% growth in May. Retail sales minus vehicles and gas rose a solid 0.8% month-on-month in June, up from analyst expectations of 0.1%, and up from an upwardly revised 0.3% growth in May. These are solid retail sales numbers reflecting an economy that continues to chug along despite a softening labor market. Nonetheless, Fed fund futures trading continues to trade essentially 100% odds of a rate cut in September.
There’s been little news out of China’s Third Plenum meeting of government leaders strategizing about how to strengthen the economy. They’re halfway through the scheduled meetings, but little has been said about discussions inside the policy room. Power generation in China rose 2.3% year-on-year in June, but that was notably lower from the 5.2% growth pace seen in the first half of the year, suggesting that the economy is slowing. That sense weighed on global crude oil prices today, with traders worried about the demand side of the balance sheet.
China continued to be an active buyer of soybeans last week – primarily from Brazil once again. Cash sources suggest that Chinese buyers purchased another 27 cargoes of soybeans last week. Buyers continue to take advantage of “cheap” soybeans available in Brazil, thanks to its currency exchange advantage versus U.S. soybeans. StoneX Brazil estimates that last year’s soybean crop totaled 153 million metric tons. Its current surveys suggest that roughly a quarter of that, or near 1.4 billion bushels are still unsold in the farmer’s hands. It’s still unknown when those bushels will be sold, but that’s enough soybeans to keep Brazil competitive in the export market through much of the rest of the calendar year. Brazil and U.S. soybean prices into Chinese ports are currently competitive from September forward, but that will also hinge on Brazilian basis levels relative to when the farmer there decides to sell. Obviously, he’s not to excited about selling at current price levels. Chinese buyers have already purchased more than 7 mmt of new-crop Brazilian soybeans for delivery early next year, but they’ve barely purchased any U.S. new-crop soybeans – choosing instead to stockpile cheap Argentine and Brazilian soybeans for possible use this fall. Is that an indication that China intends to make a move on Taiwan ahead of the November elections? Meanwhile, Chinese feed production declined by 4.2% year-on-year in June, while being down 4.1% year-on-year for the first half of the calendar year due to lower hog numbers, and as authorities ask producer to cut the inclusion rate of soymeal in hog rations to 12.5%.
U.S. corn and soybean condition ratings were essentially unchanged in the latest week as generally favorable weather conditions helped the crops hold their conditions at a time of year when they normally decline. USDA reports that 68% of both the corn and soybean crops rated Good to Excellent as of Sunday, unchanged on the week, but up from the five-year average of 63% and 60% respectively. As such, seasonally adjusted yield models ticked higher in the latest week, remaining above trend yield levels on a national basis. We know that there are definitely problems in those portions of the northwest Midwest that saw record rains in June that created flooding and ponding, and we will most likely see harvested acreage decline in those areas as a result. However, much of the rest of the nation continues to do well, indicating that production elsewhere currently has the potential to make up for losses in those northwestern areas.
