July 2 – Caution was the word overnight, as both stocks and Treasury yields pulled back ahead of Friday’s highly anticipated monthly jobs report, with a holiday between now and then on Thursday. The markets will be closed for the July 4th Independence Day holiday on Thursday, ahead of that Friday morning jobs report. The VIX continues to trade below 13, while the dollar index trades near 105.8. Yields on 10-year Treasuries are trading near 4.43%, after failing to take out 4.5% yesterday, while yields on 2-year Treasuries are trading near 4.74%. Crude oil prices hit a fresh nine-week high this morning on improving global demand combined with supply concerns as Hurricane Beryl raises risks for production areas in the Gulf of Mexico this weekend. Wheat prices pulled back overnight following yesterday’s big gains, while corn and soybean prices found strength in declining Midwest crop ratings.
The inflation story is similar in Europe to what we’re battling here in the States. Euro zone inflation pulled back a bit again last month, coming in at 2.5%, down from 2.6% the previous month. The decline came as energy and unprocessed food prices moderated. However, core inflation held steady at 2.9%, largely because inflation continues to linger in the services sector, which remained at 4.1%. The European Central Bank continues to give the same message as the Federal Reserve – more time is needed for policies to do their job. Sticky inflation in the service sector is largely a factor of a tight labor market and high wages, which are a central component to service. Data today showed Europe’s unemployment rate holding steady at a record low 6.4% for May, with the jobless rate holding more than a full percentage point below its pre-pandemic low while employment is rising. The ECB cut its benchmark rate in June, yielding to pressure to ease its restrictive policy, but policymakers are now voicing a lack of confidence that inflation is on track to reach its target in the near term. Nonetheless, like in the States, policymakers insist that their next move will likely be a rate cut, whenever the timing appears right.
China’s property market saw signs of improvement following measures taken by the central government to stimulate housing demand the previous month. The real estate intelligence agency CRIC noted that 60% of the top 100 property developers posted notable sales increases month-over-month in June, with one-third reporting higher sales values than the previous year. Furthermore, existing home transactions spiked in Chinese mega-cities, with sales in Beijing surging nearly 30% year-on-year, while sales of existing homes in Shanghai rose by more than 41% month-on-month, hitting their highest level in three years. Reported sales in 21 Chinese cities rose 16.6% month-on-month, but still remained 20.7% below year ago levels. While positive, the overall inventory of homes on the market fell by just 1.4% month-on-month, suggesting that China has a long way to go to get out of its current property sector problems that continue to plague its economy.
Cheap currencies continue to favor active Chinese purchases of Argentine and Brazilian soybeans, with buyers capturing another 33 cargoes last week. The purchases included soybeans for shipment in July and August, as well as Brazilian new crop shipments between February and April of next year. Chinese purchases of Brazilian new-crop soybeans total an estimated 5.3 million metric tons already, which is typical for this time of year. Meanwhile, its purchases of U.S. old-crop soybeans are down 22% from the previous year’s pace, with new-crop purchases a mere fraction of their normal pace for early July.
U.S. corn and soybean conditions have tumbled in recent weeks, due to a combination of too wet and too dry conditions across much of the Midwest. That said, crop condition index scores have fallen all the way down to long-term average levels for the first of July. This year’s ratings started the growing season at very high levels, so they had room to fall. Fall they did, but the descent has taken them down to “normal” levels for this time of year, suggesting that trend yields are still quite possible. Where they go from here now is the question. The next two weeks appear relatively favorable, although saturated areas of the northwest Midwest can’t dry out quick enough for their liking. The overall pattern is seasonally mild, with the dry areas seeing some relief while the intensity of rains eases in the saturated areas. Beyond that – as corn pollination increases – the pattern appears more active again with some heat building back into the Midwest, although some rains are also likely. For now, the trade is focused on the fact that crop ratings are trending lower. That’s normal for this time of year, but the ratings are trending lower at a faster pace than normal, and most of the risk premium had been removed from the market, with prices reaching some downside chart targets in recent days. That encourages end users to add some coverage, while encouraging short fund managers to claim some profits. However, I doubt that we’ll see end users panic on this bounce, without a more significant change in the fundamentals, with large amounts of farmer-owned corn in both the United States and Brazil needing to be sold in the weeks ahead.
