July 18 – Stock futures traded cautiously lower overnight as Wall Street braces for more earnings reports, and as traders absorb this morning’s June retail sales data. The VIX is trading just below 14 again this morning, while the dollar index is trading near 99.9. Yields on 10-year Treasuries are trading near 3.77% in early trade, after making new lows for the month earlier in the session, while yields on 2-year Treasuries are trading near 4.70%. The broader commodity sector benefited from light tailwinds in early trade today, with the energy and Ags broadly supported. However, crude oil prices erased their early gains on this morning’s retail sales data, while the grain and oilseed sector hung onto solid gains going into the market pause this morning.
Retail sales rose 0.2% month-on-month in June, down from analyst expectations of 0.5%, and down from an upwardly revised 0.5% growth in May. Retail sales minus vehicles also rose 0.2% month-on-month in June, down from analyst expectations of 0.3%, and below an upwardly revised 0.3% in May. Retail sales minus vehicles and gas rose 0.3%, matching analyst expectations, although down from an upwardly revised 0.5% the previous month. The headline number was a disappointment, while sales came in pretty much as expected when vehicles and gas were subtracted. This suggests that economic activity slowed a bit in June, but pretty much as expected. It took a few minutes for Wall Street to figure out if these numbers are good or bad, but in the end, we saw a bit more strength in the dollar and in Treasury yields on ideas that the data may end up keeping the Federal Reserve hawkish a bit longer, although today’s report isn’t really a game-changer.
China is focused on boosting domestic demand, as a decoupling by Western nations continues to hurt it’s export oriented economy. China’s central bank recently asked commercial banks to lower interest rates on existing home mortgages to give the consumer more discretionary spending power to spur domestic demand. China’s options for stimulating its economy appear to be somewhat limited while trying to protect the stability of the yuan. It’s believed that China has a mounting debt problem among its local governments, and it also desires to be cautious about adding stimulus that could weaken the yuan at a time when other major currencies are in a monetary tightening environment. This is no-doubt a challenging time for China’s economy.
Drought conditions in major crop-producing regions of China have largely been eliminated with recent rains, with remaining dry areas focused on northwestern portions of the country. A wetter, milder weather pattern over the past eight days provided relief for the crops to heal from earlier stress. The forecast calls for this cooler wetter pattern to continue over the next three days as well. There is an expectation that Heilongjiang, Jilin, and Liaoning in northeast China will see heavy rains over the next 10 days, creating some flooding risks for these regions. Furthermore, large areas of south China continue to suffer from extreme heat and wet conditions that risk damage to the early paddy rice crop in the region.
The Black Sea Grain Initiative ended yesterday, and Russia attacked one of the previously approved port areas today. Russia claims it hit a fuel storage facility in Odessa, along with a manufacturing plant said to be making seaborne drones as a retaliation against the recent attack on the Kerch bridge that connects Crimea to Russia. The bridge has been partially reopened, but Russia wants to make sure it stays open. The 12-mile bridge provides a critical link for providing military resources from Russia to its battles in southern Ukraine via Crimea. As for the initiative, Ukraine is already engaged in talks to reactivate it without Russia’s participation. Ukraine is currently waiting to hear from Turkey and the United Nations to see if they will participate as well. Russia is already making comments about security risks of ships moving in and out of the ports so close to a war zone, which appear to be targeted toward scaring shippers from participating. Ukraine has an insurance fund available to supplement coverage costs for shippers if they are willing to take the risk. Ukraine can also move roughly 2 million metric tons per month through the Danube ports, although that’s still far short of the volume that it would like to move.
Managed money trended out of the broader commodity sector the past year on fears that a recession will hurt demand for them. All supply and demand fundamentals were viewed through that filter. Supply risks mattered less because traders feared demand erosion. There are some early signs that the tide is slowly shifting, with some fund managers believing that it’s time to look past possible recession risks to the anticipated economic recovery. It’s too early to know whether this new trend will take hold, but the dynamics of the market have certainly seen some changes in recent weeks. I’m not making a prediction of where we’re going from here, but rather an observation of current market dynamics. The crude oil market provides a great example of a market where traders are trying to decide on whether to focus on recession fears or recovery hopes, although the latter has thus far been insufficient to press above the 200-day moving average.
