June 27 – Stock futures were quietly weaker overnight, ahead of this morning’s data release, as well as tomorrow’s key inflation data release, although they did get a bit of a bump from this morning’s disappointing data. The VIX is trading below 13, while the dollar index trades near 105.7, dropping from Wednesday’s eight-week highs. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 4.72%, Crude oil prices are modestly higher, while the grain and oilseed markets traded mostly higher as well.
Durable goods orders grew 0.1% month-on-month in May, beating analyst expectations of being flat during the month. However, the previous month’s data was revised to 0.2% growth, down from the 0.7% originally reported. Durable goods orders minus transportation fell 0.1% month-on-month in May, falling short of analyst expectations of 0.1% growth, and well below the 0.4% growth seen in April. Orders for core capital goods, which is often a measure of business sentiment, fell 0.6% month-on-month in May, falling short of analyst expectations of 0.1% growth, and down from 0.3% growth seen the previous month. This data suggests a slowing sluggish economy. Other data released this morning included a third read on gross domestic product for the first quarter, which saw GDP grow at an annualized rate of 1.4% during the quarter, up from the previous estimate of 1.3%, but matching analyst expectations. However, personal consumption expenditures grew at just 1.5% in the first quarter, down from the 2.0% pace previously reported.
First-time claims for unemployment benefits slipped to 233K in the week ending June 22, down from 239K the previous week, and down from analyst expectations of 236K claims. Yet, the four-week moving average rose to 236K claims, up from 233K the previous week. Continuing claims for the week ending June 15 rose by 18,000 to 1.839 million, which is the highest level for insured unemployment since the week ending November 27, 2021. The four-week moving average for continuing claims rose by 12,250 to 1.816 million, which is at its highest level since December 4, 2021. These numbers still are not high from a historical perspective, but they are starting to trend in that direction. The Federal Reserve has previously indicated that a softening job market is one of the things that they would need to see to justify a rate cut. The current numbers do not yet justify that rate cut according to criteria established by the Fed, but we are currently moving in that direction, which may allow the Fed to justify a cut yet this year if the current trend holds. Fed fund futures are currently pricing in just 10% odds of a rate cut at the end of July, while those odds jump to 64% for the September meeting, with a second interest rate cut being priced in for the December meeting of the central bank policy committee. Now the focus shifts to tomorrow morning’s inflation data.
The Third Plenum is scheduled for July 15 – 18, at which Chinese leadership will shape their economic priorities going forward. The conference will certainly catch the world’s attention as it occurs, although it is expected to focus more on long-term vision than on current economic problems faced by the country. Chinese leaders are expected to focus on new productive forces that are based on innovation in advanced technology that can keep China competitive in the world in the future. China released its list of the top 10 emerging technologies that it is focused on for the next three to five years at the summer Davos conference, which will likely garner policy support at the July meeting. That list included artificial intelligence, 6G networks that facilitate communication, technologies adopted in intelligent agriculture, as well as climate and environmental monitoring. China has learned that it’s easy to cast visions for the future, but history has shown that it has struggled to find practical solutions to current-day economic challenges faced by the country in an environment of declining foreign investment.
China’s Ministry of Finance allocated 496 million yuan ($68 million) of disaster aid to nine Chinese provinces suffering from severe floods in South China. China’s domestic markets are currently adding a weather premium to prices on fears that flood damage might reduce harvested areas in both the south and northeast of China, on top of developing drought concerns in the North China Plain. The forementioned flood risks also increase disease and pest risks for crops. DCE hog futures also reacted to concerns that the flooding could disrupt the movement of hogs, while also putting pig farms at risk of loss. Keep in mind that lost hogs also reduce feed demand.
U.S. grain and oilseed prices are generally finding support on the charts following this month’s big collapse, with prices falling to levels that are seen as attractive to end users at a time when farmer selling has dried up. I wouldn’t say that we’ve seen a change in the fundamentals, but we are approaching the end of the month and end of the fiscal quarter for fund managers, and we do face a couple of key USDA reports to be released midday on Friday that are known for their surprises.
