June 27 – S&P 500 stock futures suggest a new all-time high may be in play today with a risk-on sentiment settling in over Wall Street as we approach the end of the month and the end of the fiscal quarter. The upbeat sentiment is partially a product of a deal reached with China to allow for rare earth minerals to flow to the United States. The VIX is trading at four-month lows near 16 as calm returns to Wall Street, while the dollar index is trading near this week’s three-year lows near 97.1. Yields on 10-year Treasuries are trading near 4.29%, while yields on 2-year Treasuries are trading near 3.76%. Crude oil prices continue to show a firmer tone as traders refocus on emerging demand data, while the grain and oilseed markets found good support going into month-end overnight as well, with traders also positioning for Monday’s big USDA reports.
Personal income fell by 0.4% month-on-month in May, falling short of analyst expectations of 0.3% growth, and falling far short of the 0.7% growth seen in April. Personal consumption expenditures contracted by 0.1% on the month in May, falling short of expectations that they would remain steady at 0.2% growth. This data suggests that both income and spending contracted in May, which is contrary to other data suggesting that the economy bounced back in May with consumer sentiment rebounding.
Core inflation saw very modest growth in May, although falling energy prices contained the headline numbers. The headline PCE price index rose just 0.1% on the month in May, matching expectations and matching the previous month’s pace. However, the headline PCE price index crept up to 2.3% year-on-year in May, matching analyst expectations, but up from an upwardly revised 2.2% the previous month. The most watched inflation data by the Federal Reserve is the core PCE price index that excludes the more volatile food and energy sectors. The core PCE price index rose 0.2% on the month in May, up from analyst expectations that it would remain at 0.1%. Core PCE inflation rose 2.7% year-on-year in May, up from an upwardly revised 2.6% in April, but matching analyst expectations. The bottom line is that inflation is very slowly creeping higher again, and that trend will likely continue for the June data when it is released next month, but it is not soaring higher due to the tariffs as many had feared.
Another deal has been reached with China. This deal again focuses on rare earth minerals, which China has used as its leverage in the negotiations. Rare earth minerals and magnets are an essential component for today’s electronics-based global economy, including for today’s high-tech weaponry, like what was seen in Israel and the United States’ successes in the 12-day war with Iran. Most of the world has essentially handed over the rare earth mineral industry to China, believing that it was too “dirty” to handle within their own borders. This didn’t happen overnight, but rather it was a passively developing trend over many years. Now China finds itself in control of roughly 90% of the rare earth minerals needed to produce electronics, including cars, phones, appliances, and yes, those weapons that were so successful in the 12-day war in the Middle East. Some auto manufacturing in the United States was on the cusp of shutting down due to China’s withholding of these minerals. U.S. military manufacturers certainly must have been feeling the pinch as well, although that would not be publicized for national security reasons.
The May agreement allowed rare earth minerals to flow to U.S. automakers for six months. This deal apparently allows the flow to increase, but both sides are silent about the details. U.S. Commerce Secretary Howard Lutnick confirmed that rare earth minerals will flow from China once again, after the United States agreed to remove countermeasures. However, neither side wants to release details of the agreement, suggesting that both sides needed the agreement, but neither side wanted to publicize what it gave up in order to get the agreement. The United States is likely allowing semiconductors and other key electronics to flow to China that it needs for its industrial and military use. China also agreed to work with the United States in controlling the flow of fentanyl and its components to the United States, although evidence of such is still lacking. Nonetheless, the agreement illustrates that a) agreements can be reached with China, but b) it will likely be a long process to address all of the core issues between the two superpowers.
Any agreement with China raises hopes for the grain and oilseed markets, which were oversold ahead of Monday’s USDA acreage and stocks reports known for their market-moving surprises, as well as ahead of the end of the month and end of the fiscal quarter. As such, buying returned to these beleaguered markets overnight as prices rebound from this week’s big selloff. Yet, weather forecasts remain favorable over the next two weeks for the Midwest corn and soybean crops, with winter wheat yields generally coming in very good as well.
