June 21 – Stock futures came under modest pressure overnight, ahead of this morning’s scheduled comments from Federal Reserve Chair Jerome Powell. Even so, the VIX remains below 14 this morning, reflecting a sense of complacency on Wall Street as we slide into late June, while the dollar index is trading near 102.6. Yields on 10-year Treasuries are trading near 3.76%, while yields on 2-year Treasuries are trading near 4.73%. Crude oil prices are modestly higher in quiet trade, while the grain and oilseed markets are surging higher on weather concerns.
Wall Street traders expect / fear that Powell will paint a hawkish view in today’s comments, following through on its recent policy statement, particularly after yesterday’s better-than-expected housing starts numbers. The Federal Reserve continues to under-estimate the strength of the factors causing this current round of inflation, continuously forecasting that it will fall back below 3% by the “end of the year” for the past couple of years. However, Wall Street has continually under-estimated the Fed’s commitment to get inflation back down to the 2% mandate. I continue to contend that it cannot get it back down to 2% without being more aggressive to slow the labor market.
China is reportedly placing troops at a place in Cuba, according to various news reports, located at an old Soviet listening post that the former U.S.S.R used to spy on the United States. It’s speculated that China is taking over the post to establish its own listening post from which it can spy on the United States. This certainly isn’t the first time that one country has spied on another, but it certainly contributes to the increased tensions between the United States and China. U.S. Secretary of State Antony Blinken just visited China, attempting to cool the rapidly rising tensions between the two countries, by stating while there that the United States does not support independence for Taiwan. However, the United States has been actively working to build a coalition of nations who will stand opposed to China due to its recent aggressive nature. The United States has worked to build alliances with other Pacific nations, as well as Europe. The European Union is China’s second largest trading partner, but it is considering export controls targeting China. As such, China sent Premier Li Qiang, it’s number 2 in power official below President Xi Jinping, to Germany and France on a six-day trip to try to repair relationships. China’s economy is struggling, with exports trending lower – especially to the United States and to Europe. It’s also been hosting key business CEOs from the United States seeking to repair relationships. China is desperately trying to stop the hemorrhaging before its economy slides into a deeper recession.
However, those tensions flared again last night, a day after Blinken returned home from China, when President Biden referred to Xi Jinping as a “dictator.” The comment was ill-timed, after both sides had taken steps to heal rising tensions between the two countries. Tensions between China and the United States are now at an all-time high, raising fears of a deteriorating trading relationship between the two, as well as raising the risks of an “accidental” war between the two. Russia jumped in to defend China, with the Kremlin issuing a statement that Biden’s comments contradicted Blinken’s efforts to ease tensions. It went on to call the comments “incomprehensible” and it added that this reflects the contradictory nature of U.S. foreign policy, giving it a “large element of unpredictability.” China is the world’s largest importer of commodities, with a major portion of those commodities historically coming from the United States, especially in agriculture. However, China is actively diversifying its purchases of agricultural and energy commodities away from the United States, which could negatively impact U.S. export demand projections going forward.
USDA rates the U.S. corn crop at 55% Good to Excellent this week, down 6 points on the week and down 14 points from typical levels for mid-June. The soybean crop is rated 54% Good to Excellent, down 5 points on the week and down 14 points from normal levels. Midwest crop ratings are poorest in Missouri, Illinois, and Michigan, but surrounding areas of Iowa, Indiana and Wisconsin are also under continued moisture stress. The current ratings would suggest a 5%+ decline in the national yield, although correlations are weak at this point. That’s also similar to where my yield models would be in mid-June as well, although again, correlations are weak in June. Looking at history, similar corn crop ratings in mid-June produced one year of above-trend yields in 1992, a couple of years of below trend, and a couple of years of near-trend yields. Similar soybean condition scores or lower produced five below-trend yields, one above (1992) and one near trend. Forecast models continue to show relief for the central Midwest in the week #2 time period, but that relief fails to move forward and to verify. Atmospheric signals continue to say that “this time it will happen,” but we have to assume otherwise until it actually does. This is not a “dome of doom” situation like we saw in 2012 when a massive high-pressure set up over the Midwest that brought intense heat and drought. Temperatures are seasonally mild in most areas, and there continues to be scattered showers in the majority of the Midwest. But the central portion of the Midwest continues to run far short of the moisture needed for crop development, pulling crop ratings lower in a key production areas. This has traders reluctant to be short corn and soybeans, even with demand weak, until we know the extent of the losses.
