June 2 – Stock futures bounced overnight following passage of the debt ceiling bill in the U.S. Senate, that then sent the measure to President Biden for his signature. Even so, traders were cautious ahead of this morning’s monthly jobs report that is expected to have implications when the Federal Reserve meets later this month to consider changes to its monetary policy. The VIX fell to a year-and-a-half low near 15 overnight, reflecting easing fears on Wall Street. The dollar index is trading near 103.6 this morning, initially finding strength in Treasury yields following the release of this morning’s jobs report. Yields on 10-year Treasuries are trading near 3.63%, while yields on 2-year Treasuries are trading near 4.41%. Crude oil prices are 2% higher this morning on renewed optimism about the economy. The grain and oilseed market came under pressure overnight, but prices firmed somewhat as U.S. desks opened this morning, with soybeans and the edible oils markets trading in positive territory, followed by wheat, with corn prices still mostly in the red.
The economy created 339K jobs in May, according to this morning’s monthly jobs report, which came in well ahead of trade expectations of 190K jobs created. Furthermore, the April number was revised to 294K jobs created, up from the 253K originally reported. In other words, these numbers fit with yesterday’s data, indicating that the jobs market started to heat up a bit again in April, with that momentum carrying into May. Private payrolls grew by 283K in May, up from analyst expectations of 165K, and up from an upwardly revised 253K in April. The job participation rate remained unchanged at 62.6%, but the unemployment rate still managed to climb to 3.7%. Professional and business services added 64K jobs in May, similar to the previous month. Government payrolls added 56K workers in May, up from the 12-month average of 42K. Healthcare added 52K workers, which was close to their average of 50K, while leisure and hospitality added 48K – mostly in food and drink service. Construction added 25K jobs in May, up from the average of 17K.
The higher unemployment rate is a move in the right direction regarding the Fed’s attempts to bring the number of job applicants in line with the number of job openings, but that number likely needs to fall between 5% and 6% to achieve the balance needed to bring overall inflation down to the 2% mandate. Average hourly earnings rose 0.3% month-on-month in May, matching analyst expectations and down from a downwardly revised 0.4% in April. Average hourly earnings rose 4.3% year-on-year in May, down from analyst expectations that they would be unchanged at 4.4%. This too is a move in the direction desired by the Federal Reserve. The average workweek ticked lower to 34.3 hours. This suggests lower need for man-hours on the workforce. The bottom line is that today’s numbers provide something for both the hawks and the doves on the Federal Open Market Committee of the Fed. It’s interesting to note that today’s data indicates that 5.5 million people want a job, but are unemployed and not currently seeking a job, or were unavailable to accept a job, unchanged from the previous month.
The Ukraine grain initiative is seriously wounded. Russia reportedly informed the U.N. Joint Coordination Center it will continue to block registrations of ships desiring to move to the Ukrainian Port of Pivdenny – the largest of the three previously approved ports – until Ukraine allows the movement of ammonia through pipelines crossing its territory to export terminals. A total of 33 ships left Ukrainian ports in May, which is half the April total, while just three left the Port of Pivdenny. Russian inspections of ships allowed to move to the other two ports total just two per day. This comes at a time when Ukraine exports over land to Eastern Europe are also being challenged by resistance from the five border countries whose cash prices are suppressed by the cheaper supplies flowing west. This is a long-term risk to the markets that is currently not a focus due to the large amount of cheap Russian wheat currently available on the world market, as well as the bumper Brazilian corn crop about to be harvested.
This will be another critical weekend for this year’s U.S. crops, even though it remains very early in the growing season. This week’s Drought Monitor confirmed the problem of dry soils across much of the Midwest. The trade is focused on the anticipated pivot in the pattern as El Nino develops at a near-record pace. This week saw scattered thunderstorms pop up and over-perform forecast models across many areas of the central and western Midwest, which provides indication that the atmosphere is changing as expected, moving toward an anticipated pivot a little over a week from now. The rains thus far haven’t solved the problem for most, but they are part of the necessary step forward. Monday’s USDA weekly crop progress report will likely show some more deterioration of crops in the Midwest, but traders will most be interested in seeing if Sunday night’s models continue to move the rains forward in the forecast. I should say that there is some disagreement in the models, with the usually more reliable European model remaining drier, especially in the northern Midwest. However, the European model also tends to struggle to accurately forecast changes in the MJO cycle in the Pacific in its current phase, according to forecasters that I consult with, and it’s that MJO cycle that is driving the pattern as we transition into El Nino. As such, many forecasters are favoring the wetter GFS Ensemble forecasts.
