June 27 – Stock futures were mixed overnight, with this morning’s durable goods orders data doing little to change that. The VIX is still trading near 14, while the dollar index slips lower to trade near 102.4. Yields on 10-year Treasuries are trading near 3.73%, while yields on 2-year Treasuries are trading near 4.68%. Wall Street is adjusting to the higher interest rate environment, while it continues to be a drag on the commodity sector. Crude oil prices are nearly 1% lower this morning, while rain in the forecast has the grain and oilseed sector 2 to 3% lower.
Durable goods orders rose 1.7% month-on-month in May, up from 1.1% gains in April, and beating analyst expectations that they would fall by 1.0% during the month. Durable goods orders excluding transportation rose by 0.6% month-on-month in May, reversing the 0.2% decline seen in April, and much better than the 0.6% decline anticipated by analysts. Core capital goods, which is generally seen as an indicator of business sentiment, rose by 0.7% month-on-month, beating analysts estimates of 0.6% growth. However, those gains came off a smaller base, as the April number was revised to 0.6% growth, down from 1.4% growth originally reported. Nonetheless, these are healthy numbers for the economy, suggesting that the Federal Reserve’s actions have not yet dragged the economy into a recession. In fact, recent data showed that the number of people worried about keeping their job is in decline as this economy continues to push forward, and that is the opposite of what the Fed needs to see happen to bring wage inflation under control. We’ll get critical data on consumer confidence later this morning, as well as additional data from the housing sector. But traders will likely most be focused on the personal consumption inflation data scheduled for release on Friday, which is expected to show core inflation still at 4.7%, where it’s remained sticky.
Putin is in full control in Moscow – at least that is the image that he is now trying to portray. The weekend coup attempt is over, and Russian President Putin is back out in the public, re-asserting himself as the unquestioned leader of Russia. The man who staged the coup attempt, Yevgeny Prigozhin, is allegedly in exile in Belarus based on the tracking of a plane connected with him landing in the capitol city of Minsk overnight. All charges have reportedly been dropped against he and his mercenary army. Putin needs them back in Ukraine to fight the war against Ukraine, which has reportedly reclaimed nine cities thus far during its summer offensive. The mercenary army is made up of ex-convicts and other professional fighters who made up Russia’s strongest fighting force under Prigozhin, until Putin insisted that they all sign contracts with the Russian military. It’s uncertain how many of these fighters will return to the posts and put their signatures on the contracts. They were less likely to do so if their former leader was punished, although he too likely has a target on his back now. Putin is making all the necessary public appearances to be seen as a leader, but the fear is that he will take aggressive action in Ukraine to reassert his ability to lead the war to a successful conclusion. None of the events of the past weekend do anything to strengthen his army, raising questions of what unconventional methods Putin might utilize to take back control of the war.
China state media reports that China is expected to see 6.2% GDP growth in the first half of this year, as reported at the China Macroeconomy Forum, although it’s difficult to see how that can happen when breaking down the numbers. Exports are expected to be down 4.9% year-on-year this year, after rising nearly 34% last year. That means that domestic growth will need to top 8%, but that demand has been losing momentum in the second quarter as consumers worry about a declining economy. Noticeably absent from recent speeches by Chinese leader has been any mention of the long-anticipated stimulus needed to give consumers confidence in their economy again. Furthermore, El Nino-related heat and drought raises concerns about this year’s corn and soybean crops, as well as it’s ability to meet energy demand.
Will the rains finally fall in dry areas of the central Midwest? We’ve seen signs of hope before that didn’t pan out, so caution is warranted. Nonetheless, the models are definitely trending wetter in successive runs. We now see good model agreement for the best opportunities for good rains to fall from Nebraska and Kansas east across to Ohio over the coming week, with follow through rains seen in week #2 as well. Will it happen? I don’t know. But the market was confident enough in it overnight to support a broad sell-off, even following much larger than expected cuts in crop ratings for corn and soybeans. This still leaves an area of concern going forward over the Great Lakes and northern belt. We’ve seen these low crop ratings before, and sometimes they’ve resulted in short crops and sometimes they’ve resulted in trend, or even better than trend yields (1992). The odds would favor a below-trend yield, and chances are increasing that we’ll see a rare July yield reduction from USDA in its monthly crop report on the 12th. But don’t expect the 20-bushel decline seen in the July 2012 report. That year saw both heat and dryness locked in across the Midwest, while this year it is primarily dryness. That makes a difference in USDA’s model. Nonetheless, we still can’t count out a strong positive El Nino influence in July and August to pull yields back up, shifting the emphasis back again to a weak demand outlook.
