March 17 – Stock futures pulled back a bit from Friday’s bounce as traders waited to see this morning’s retail sales numbers, but they then rallied on that data. The VIX is trading near 22 at this hour, while the dollar index is trading near 103.5. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 4.04%. Crude oil prices are 1% higher as the market continues to find value buyers in the $65 - $67 per barrel range, while the grain and oilseed sector was mostly higher overnight, led by rallying wheat prices.
Retail sales rose 0.2% month-on-month in February, falling short of the 0.7% growth expected by analysts. Furthermore, the January number was revised to -1.2%, down from the -0.9% originally reported. Retail sales minus vehicles rose 0.3% on the month in February, missing analyst expectations of 0.4%. The January number was revised to -0.6%, down from the -0.4% originally reported. However, retail sales minus vehicles and gas rose at 0.5% on the month in February, matching analyst expectations. The January number was revised to -0.8%, down from the -0.5% originally reported.
The Empire State manufacturing index fell to -20 in March, down from 5.7 in February, and below analyst expectations of +0.2. Both new orders and shipments declined this month, while delivery times and supply availability remained steady, while inventories continued to grow. Employment levels and hours worked continued to move slightly lower in the New York Fed district. Input prices increased at their fastest pace in more than two years, while selling prices also continued to escalate. Optimism about future business conditions “waned considerably” for a second consecutive month. In other words, stagflation risks are rising.
China unveiled more of its economic strategy following its recent annual “Two Sessions” policy meeting. China’s cabinet unveiled a plan on Sunday that would seek to boost employment opportunities, raise the minimum wage, and provide investment, along with increased fiscal and credit support for stimulating consumer spending. The plan also seeks to stimulate a higher birth rate by supporting childcare. China’s birth rate fell below its death rate several years ago, creating long-term demographic problems for supporting its economic growth. China will also seek to encourage imports of high-quality lifestyle services, such as healthcare, culture and entertainment, while also expanding its visa-free entry policies to stimulate inbound tourism. All of this will cost money, expanding China’s debt at a time when it has expanded spending for its military by roughly 15% over the past two years. It is reminiscent of how President Reagan broke the bank in the U.S.S.R by forcing it to rapidly increase military spending. President Trump is doing the same thing to China. The U.S.S.R. collapsed and broke up as a result. I’m not forecasting a collapse of China, but Trump’s plan does create significant challenges for China’s ambitious stated plans to become the world’s dominant economic and military power. It is interesting to note that its stock market remains elevated from levels seen prior to the stepped-up stimulus that started in September, but we continue to observe that much of the buying continues to come from state-backed funds – another cost for China to absorb.
Eight people died in a tragic crash involving more than 70 cars and trucks on Interstate 70 in western Kansas on Friday. A severe dust storm caused visibility to drop to near-zero for travelers, leading to the tragedy. The dust storm was a symptom of the extreme dry across the southern half of the Plains, which became evident to many when a strong storm system moving across the region whipped up winds topping 80 miles per hour at times. I-70 is back open again, although many people continue to grieve the loss of loved ones. But the drought that created the deadly scenario is still with us, creating challenges for the hard red winter wheat crop. Combine that with ongoing dryness in Russia’s winter wheat belt, and reduced exports out of the region, and you set up the scenario for higher wheat prices again overnight. Volume wasn’t strong, and current strength has more to do with speculative short covering and value buying, but the crop’s problems are providing support beneath the market.
No progress was observed over the weekend in the tariff stalemate with Canada, Mexico or China. Mexico’s President Sheinbaum continues to do her talking privately with President Trump, which is another reason that I expect to see something worked out between the two relatively soon – if not by April 1st, then soon thereafter. However, relations with Canada appear to be deteriorating as it seeks to form a functioning government. Tensions remain high with China as well. Mexico remains the key market to hang onto at this point, and I believe that it is in the best interest of both Trump and Sheinbaum to do so. The tariff war with Canada will definitely hurt several sectors, but Mexico is the bigger market to get worked out here. Yes, China is our largest buyer of soybeans, but China has been moving away from the United States for years, and that trend will likely continue regardless.
