May 17 – An upbeat bias built on hopes of a rate cut continued to support stock futures overnight, following a move into record territory again on Thursday. The VIX is trading at a five-month low near 12 this morning, while the dollar index is trading near 104.7. Yields on 10-year Treasuries are trading near 4.40%, while yields on 2-year Treasuries are trading near 4.80%, as the inversion remains relatively wide. Crude oil prices are modestly higher, probing just below chart resistance near $80 ahead of the weekend, while the grain and oilseed markets traded mostly higher on rising weather and geopolitical risks going into the weekend.
China’s retail sales grew 2.3% year-on-year in April, down from 3.1% in March and below analyst expectations of 3.8% growth. It was the sixth consecutive decline for the key economic number, indicating that the engine of China’s economy is losing steam. China’s domestic market contributed roughly 80% of the country’s growth last year. Significant concerns over the property sector, and elevated geopolitical tensions have weighed on consumer sentiment more than expected, even though the current economy heavily relies on a strong domestic market to overcome other economic challenges. Restaurant sales rose 4.4% year-on-year, down from 6.9% in March, and just half the average growth at around 9% before Covid-19. Furthermore, autos, the sector that officials hoped would lead domestic consumption, saw April sales falling 5.6% year-on-year, down from 3.7% in March. In other categories, home appliance sales slowed to 4.5% growth from 5.8% the previous month, and furniture sales rose 1.2%, while jewelry was down by 0.1% year-on-year, and clothing sales declined by 2% year-on-year.
The country’s fixed asset investment, including infrastructure construction, manufacturing, and property, rose 4.2% year-on-year from January to April, down from 4.5% in the last reporting period, and below expectations of 4.6%. Property investment continued to be a key drag, falling by 9.8% year-on-year in the first four months, deepening from (- 9.5%) in the last report. Meanwhile, investment in infrastructure rose 6% year-on-year, down from the 6.5% growth reported in March. Investment added to upgrade facilities and equipment in manufacturing moderately declined to 9.7% growth from 9.9% in March. This indicated that the government-driven investments used to offset the deficit from the property sector were not big enough, and that was likely due to budget limitations of the local governments that were limited by existing high debts. Official data showed that new building house sales by area dropped by 20.2% in the first four months, worse than 19.4% decline in the March report, while the total sales by value fell by 28.3% year-on-year, weaker than 27.6% decline in the last report.
China’s economic challenges continue to grow, rather than to improve. Rising geopolitical tensions continue to be one of the factors that weighs on consumer sentiment, slowing purchases. President Xi Jinping’s public comments during his meeting with Russian President Vladimir Putin will not help things. Putin and Xi exhibited total commitment to unity with one another. That’s really not a secret, as they’ve been moving in that direction for several years. But boldly proclaiming their unity – including support for the Ukraine war – will not endear Europe to China. Both Europe and the United States have been deleveraging from China. Xi recently took a trip to Europe attempting to rebuild economic ties with that region. But Xi’s bold support for Russia’s war on Ukraine fails to acknowledge how Europe views that war. Europe sees Russia’s attack on Ukraine as a threat to it as well. Europe cannot support trade with China while China is supporting Russia’s attack on Europe’s doorstep. This may have been a strategic mistake for Xi Jinping, further threatening his country’s economic wellbeing. But it also means that he may have given up on avoiding a direct conflict with the United States as well.
An oil refinery at the Russian city of Novorossiysk was struck by drones and missiles overnight, garnering the attention of the commodity markets. Novorossiysk is located on Russia’s Black Sea coast. It’s where Russia moved much of its Black Sea fleet after Ukraine started attacking that fleet when it was located near Crimea. The port at Novorossiysk is also a major port for the export of grain and energy commodities. At least eight explosions were reported by local residents during the attack, which also led to power outages in the region. However, our sources indicate that grain loading activity continues at the port today. Ukraine has been targeting refineries – sometimes deep into Russia – in order to disrupt its fuel supplies for the war effort. That has resulted in reduced exports of diesel from Russia as it prioritizes its own domestic and war needs, providing some evidence of its effectiveness. Ukraine has thus far refrained from direct hits on Russia’s grain export infrastructure, although that risk remains. Russia continues to target Ukraine’s grain export infrastructure, yet Ukrainian grain exports continue at levels near what they were pre-war. Nonetheless, the risk remains. The Russian – Ukraine war continues to slowly escalate, which then continues to slowly elevate risks for the commodity sector.
