July 20 – The tech sector is a drag on stocks this morning following a disappointing earnings report from Netflix, with Tesla providing a somber note as well. However, a third night of airstrikes on Ukrainian port facilities brought a more muted response in the commodity sector. The VIX is trading near 14 in early trade this morning, indicating a lack of worry to negatively impact stocks. The dollar index is trading near 100.5 this morning, while yields on 10-year Treasuries are trading near 3.81% and yields on 2-year Treasuries are trading near 4.84%. The dollar followed Treasury yields higher following the release of this morning’s weekly jobless claim data. Crude oil prices were modestly higher this morning as they creep closer to another possible test of chart resistance at the 200-day moving average, while the grain and oilseed markets steady to higher as well.
First-time claims for unemployment benefits fell to 228K in the week ending July 15, down from 237K the previous week, and down from analyst expectations of 241K. The four-week moving average fell to 237.5K claims, down from 246.75K claims the previous week. Continuing claims for the week ending July 8 increased by 33K to 1.754 million, while the four-week moving average slipped lower by 1,750 to 1.732 million. Wall Street focused on the declining headline number, reflecting the current trend of a tightening jobs market. It knows that matters to the Federal Reserve, as containing wage inflation is one of the primary keys to closing that gap to the 2% inflation mandate. It took two years to get down to 3% but going the final 1% to get to 2% will likely be the most difficult part of this fight if the economy is heating up again with a tightening jobs market.
Russia executed airstrikes on Ukraine port facilities for a third night in a row, although the response by the commodity markets was less explosive this time around. The seriousness of the situation was seen in a threat from Russia on Wednesday when it said that it would consider any ship moving toward Ukraine as possibly containing military equipment and a possible target. Ukraine has since warned that any ships heading to ports in Russia, or occupied areas of Ukraine, may also be considered military targets. This is the risk that I’ve been warning that we could eventually reach. The market told us on Monday that Russia pulling out of the Black Sea Grain Initiative really didn’t matter near-term, because Russia is still dumping record quantities of cheap wheat onto the world market, and Brazil is currently releasing large volumes of cheap corn onto the market. The trade expected that Ukraine would “find a way” with the help of the United Nations and Turkey to open a new “safe corridor” for shipping grains longer-term. Fund managers maintained their massive short positions in wheat and their expanding short positions in corn. That all changed when Russia started bombing Ukraine’s port infrastructure, which would take a year or more to repair. That also raised the risk of retaliation in a way that might threaten the willingness of shippers to haul Russian grain through the Black Sea as well. The odds of that may be low, but the implications are massive for world wheat supplies, and that’s why speculative shorts rushed to unwind their positions so aggressively this week.
Headline inflation fell to 3% largely with the help of declining commodity prices over the past year. Wall Street has largely operated off the assumption that commodity prices were down to stay, but that can no longer be assumed. The statistical correlation between our StoneX Commodity Index and the headline consumer price index over the past 10 years is 0.91, which is a very strong correlation. Typically, we consider any correlation over 0.70 to be strong. As you would expect, there’s a bit of a lag between commodity prices and the CPI, with commodity prices rising just before the CPI rises, and visa versa. We’ve seen the short covering in corn and wheat prices as Black Sea tensions escalated this week, but now we need to see if the developments support building significant speculative ownership. There are implications there for the crude oil market as well, particularly if shipments from Russia would see increased risks. All of this will have implications then for the Federal Reserve’s decisions about monetary policy going forward.
Weather remains a factor for Midwest crops, that has largely been overshadowed by the Black Sea crisis. The pattern is expected to trend warmer and drier over the remainder of the month; perhaps lasting into the early days of August. An oppressive heat dome isn’t expected, nor do forecasters expect it to be totally dry. The forecasters that we follow also expect the pattern to be temporary in nature, with cooler wetter conditions expected in August. But there’s always a risk that the high pressure could become locked in. The risk is relatively low, but it cannot be discounted. We’re less than two weeks away from the first of the private production estimates.
