June 8 – Rising Treasury yields have Wall Street once again worried about Fed rate hike risks this week, weighing on stocks, although that sentiment was impacted somewhat by this morning’s jobless claim data. The VIX is trading near this week’s three-year low near 14, dropping lower with the data release. The dollar index is trading near 103.6 this morning, declining with Treasury yields in the moments following the jobless claim data release. Yields on 10-year Treasuries are trading near 3.78%, which is off their nearly a two-week highs set earlier this morning, while yields on 2-year Treasuries are trading near 4.52%. Crude oil prices are trading modestly higher this morning, while the grain and oilseed sector is mixed, wheat bouncing from yesterday’s big losses, while new-crop corn and soybean prices remain under pressure as rains continue to move forward in this week’s forecast.
First-time jobless claims rose to 261K in the week ending June 3rd, up from 233K the previous week, and above analyst expectations of 235K claims. This pushed the four-week moving average to 237.25K claims, up from 229.75K the previous week. However, continuing claims for the week ending May 27 fell 37K to 1.757 million, with the four-week moving average dropping 12.5K to 1.785 million. The continuing claims number suggests that the job market remains tight, but Wall Street chose to focus on the rise in the weekly claims number, which is a more current indicator. Traders saw the past week’s increase in jobless claims as indication of a softening jobs market that would give the Federal Reserve room to pause in its rate hikes. Of course, traders are hoping for a pivot to rate cuts, but based on comments made by Fed members in recent weeks and months, that’s not likely any time soon.
The yuan drifted lower versus the dollar today as China cut interest rates on domestic deposits to encourage spending in the local economy. China’s commercial banks lowered their rates on 1-year deposits to 1.65%, with the 2-year rate falling to 2.05%, according to today’s edition of China Direct, published by our Shanghai office. Bank margins are being squeezed by a lack of residential and commercial loans, so the rate cuts eases their margin pressure, while encouraging depositors to put more of their money at work in the economy. Domestic analysts believe another rate cut will be needed in the second half of this year. Analysts continue to hope for a big stimulus package from the Chinese government, but thus far that has not happened. Excavator sales are considered an indicator of construction activity in China. Total May sales of 16.8K units were down 18.5% year-on-year, and down 10.4% month-on-month. Domestic sales made up less than 40% of the sales, and they were down 45.9% year-on-year. However, export sales were up 21% year-on-year, with many of those going to China’s “Belt and Road” projects. That is one of the primary reasons for the “Belt and Road” initiative – to provide cheap financing to foreign countries to build projects requiring Chinese equipment and that build dependency upon China when doing so. Year-to-date excavator sales were down 23.9% in May from the previous year’s pace, with domestic sales down 43.9%, while export sales up 13.9%. Keep in mind that domestic sales are down sharply versus a low base from last year when Covid lockdowns were in place, making the numbers even worse.
Rain clouds are expected this weekend to bring relief to dry areas of the Midwest. Not everyone will see relief, but this is the first wave of what is expected to be the highly anticipated pivot in the weather pattern as El Nino gains strength. Sea surface temperature anomalies in the central equatorial Pacific are rapidly warming, pushing through weak El Nino status to now approaching moderate strength levels. There will likely be pullbacks, which is normal, but the trend is clear. This is one of the fastest developing El Nino’s on record, and it is expected to reach the strong category by late summer. I’m still concerned about indications that the northwestern 25 – 30% of the corn acres may be left wanting for more rain. It doesn’t appear that these areas will be totally dry, but they may not receive as much as they would like or need. This will be the area that we’ll need to monitor going forward.
USDA will release its June WASDE crop report at midday tomorrow. USDA could justify cutting old-crop corn demand by 100 million bushels, between disappointing export and ethanol use. It probably won’t go that far in this report, but that day is likely coming. Export inspections fall short of the seasonal pace needed to hit USDA’s target by 80 million bushels, with a big Brazilian crop about to hit the market. Ethanol use needs to average roughly 460 million bushels per month through the summer, which would be up from the 417 million average of the past three months. USDA isn’t likely to touch soybean exports yet at this point, but it may bump crush a bit. As such, soybeans have been getting the benefit of spreading versus corn this week, with upcoming rains hitting new-crop contracts.
