March 10 – Tariffs and inflation are expected to be the focus this week, with traders continuing to scan the headlines for policy changes while waiting for key inflation data mid-week. Stock futures came under notable pressure overnight as traders worry about recession risks due to President Trump’s numerous tariffs threats and actions. The VIX is trading near new highs for the year above 26 this morning, with the dollar index trading near 103.8. Yields on 10-year Treasuries are trading near 4.25%, while yields on 2-year Treasuries are trading near 3.95%. Crude oil prices are modestly higher after uncovering fresh buying interest late last week at new long-term lows. The grain and oilseed sector was mixed to firmer overnight, led by rebounding wheat prices.
Canada’s Prime Minister Justin Trudeau is on his way out. Canada lacks a government currently, and Trudeau lost the support of his party as well. Canada’s Liberal party selected former central banker Mark Carney to replace Trudeau, who will now try to form a new government to lead. However, whatever government coalition that he is able to form will likely be short-lived, as Carney is expected to call an election in the coming weeks. The Liberal Party had lost considerable support in Canada – until President Trump increased his rhetoric about the “51st State.” That has renewed a sense of nationalism in Canada that has the Liberal Party gaining momentum once again. Carney wants to grab that momentum, hoping that it will help his party regain power once again. Even so, Carney is expected to take steps to cap immigration, while scrapping consumer taxes on carbon and while stopping a planned increase in the capital gains tax. Carney indicates that he supports a dollar-for-dollar match of Trump’s tariffs, although it is unclear if that’s Canadian dollars or U.S. dollars in the match. Most significantly, he intends to keep “his cool in the face of Donald Trump,” which may ease the rhetoric on Trump’s side somewhat as well.
President Trump threatened to raise the tariffs on Canada and Mexico above the 25% level in comments made over the weekend. The 25% tariffs were reinstated this past week on Tuesday, but then they were paused until April 2nd on those products that are covered by the trade agreement that we have with the two countries. Mexico President Sheinbaum has done the best job of working with President Trump through this tariff face-off, holding somewhat regular discussions with him – negotiating in private rather than in the media as Trudeau had been trying to do. The White House continues to indicate that the 25% tariffs are about stopping the flow of fentanyl across the border into the United States, but Sheinbaum’s recent comments and actions against China suggest that the behind-the-scenes discussions with Trump have also been focused on China. Yes, the fentanyl issue is significant for Trump, but I also continue to believe that Trump is leveraging Mexico and Canada to contain China, the same as he is doing with the Ukraine situation. I still believe that we’re making progress with Mexico, but Canada remains a challenge in the absence of a functioning government. Neither Canada nor Mexico can afford this trade war, but it will leave everyone in the commodity world very nervous until an agreement is reached.
China can’t afford this trade war either, but it is not backing down from it. Deflationary pressures are increasing in China, reflecting sluggish consumer demand. China’s official consumer price index was down 0.7% year-on-year in February – its lowest in 13 months. Its core CPI that excludes food and energy fell 0.1%, while service prices dropped 0.4% year-on-year. China’s producer price index – a precursor to the CPI – fell 2.2% year-on-year in February. It’s been in a deflationary mode for the past two and a half years. This suggests that China’s economy may be trapped in this deflationary cycle for a while longer, despite numerous stimulus packages implemented by the government in recent months. I initially anticipated a short-term trade agreement between China and the United States in the first half of this year that would last the duration of the Trump presidency, allowing China’s economy to heal so that it could resume it’s long-term goals after Trump is out of office. But Trump seems to have stepped on President Xi Jinping’s pride, resulting in him digging in his heels to resist Trump.
USDA will release its monthly WASDE crop report midday tomorrow. This is expected to be a relatively quiet report, with the primary focus being on USDA’s March 31 planting intentions and quarterly stocks reports that are known for their market-moving surprises. The pause on the tariffs until April 2nd allowed the market slide to pause. Corn and wheat prices had fallen to levels that were very attractive to many end users, triggering fresh buying. Stress continues to build for up to one-half of Brazil’s winter (safrinha) corn crop this week, due to a lack of rain. The forecast continues to show rain relief in week #2, but those rains continue to fail to roll forward. The next couple of months will also be critical for much of the Northern Hemisphere winter wheat crop at a time when exporter stocks outside of the United States are rather tight. Those factors provide support for the cash corn and wheat markets at these levels, while soybeans feel the active harvest pressure in Brazil.
