March 19 – Stock futures traded modestly weaker overnight, ahead of today’s start to the March meetings of the Federal Open Market Committee, although stock futures came off their lows on better-than-expected housing data released this morning. Traders are also digesting the impact of major policy changes announced today by the Bank of Japan. The VIX is trading near 15 this morning, easing back from its session highs following the release of this morning’s housing data, while the dollar index is trading near 103.9, after trading to its highest level since March 1 earlier this morning. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 4.70%. Crude oil prices are firm after hitting fresh four-month highs above $83 per barrel on Monday, while the grain and oilseed markets are mixed to firmer in early trade.
Housing starts surged in February to an annualized rate of 1.521 million units, up from an upwardly revised 1.374 million the previous month, and above analyst expectations of 1.449 million units. New permits to start building also surged to an annualized rate of 1.518 million in February, up from 1.489 million the previous month, and above analyst expectations of 1.500 million. This fits with yesterday’s rise in the housing index, reflecting renewed demand for housing as consumer sentiment trends higher, and as consumers adjust to a higher rate environment. This week’s housing data will no doubt give policymakers a reason to pause before considering rate cuts.
The Bank of Japan raised its benchmark interest rate today for the first time in 17 years, while also ending eight years of negative interest rates. The BOJ also brought an end to its yield curve control policy that was implemented in 2016, which capped long-term interest rates near zero, while also discontinuing the practice of purchasing risky assets. The BOJ stated that it is reverting to a normal monetary policy going forward, although interest rates remain near zero, and it continues to buy roughly the same amount of government bonds as it did before, while keeping the door open that it might increase those purchases if yields rise too rapidly. Japan’s public debt is twice the size of its economy, raising significant risks for its fiscal balance sheet if interest rates rise too far. The next concern is, how will this policy change impact the global financial markets. Japanese investors sent their assets overseas seeking positive returns over the years, becoming the primary holder of U.S. debt certificates in the process. Those investors are expected to move more of their assets home once again as the domestic investment environment improves. The Japanese yen surged in value on global currency markets on today’s announced BOJ policy changes.
China’s industrial output rose by 7% year-on-year in the first two months of the calendar year, exceeding market expectations of 5% growth, while also posting the biggest rebound since the Covid pandemic. This resurgence of growth in the sector was credited to Beijing’s stimulus measures announced in October, with 39 of 41 industry categories posting growth in the first two months of the year. Yet, concerns remain on whether this growth can be sustained if the property sector continues to spiral downward. Property sales fell 20.5% year-on-year in the first two months of the year, after falling 8.5% in December. The value of those properties sold dropped by nearly 30% year-on-year, pushing many of the troubled real estate firms further under water. Newly started property projects were down 30.5% year-on-year in the first two months of the year, after being down nearly 21% in December. Construction in the housing sector typically creates jobs for roughly one in five Chinese workers, so the slump in projects is expected to push the unemployment rate upward, decreasing consumer spending.
China offered 8.3 million bushels of soybeans at auction today, drawing the soybeans from its massive reserves. This is the first batch of offerings, which are expected to reach nearly 75 million bushels in the weeks to come. Keep in mind that I previously warned six months ago that China was building reserves, possibly to reduce its need to purchase soybeans from the United States. USDA estimates that China’s known supplies will reach 1.38 billion bushels by the end of the current marketing year, up by more than 450 million bushels over a two-year period. The current offering is meant to fill a void of low purchases from the United States ahead of the availability of new-crop Brazilian supplies – most of which are still on the water on their way to China. Chinese buyers purchased another 25 to 30 cargoes of soybeans last week, primarily for April and May shipment from Brazil. Meanwhile, we saw risk premium again added to wheat prices overnight, providing some support for corn prices as well, due to escalating geopolitical risks in the Black Sea region. Ukraine continues to strike Russian oil refineries, while Russia has retaliated by stepping up its attacks on Ukraine export infrastructure.
