May 23 – Geopolitical risks are rising, and interest rates will likely be “higher for longer,” but stock futures suggest that we will see new record highs today, while the VIX slips to below 12 to post its lowest low since November 2019. The minutes of the latest Federal Reserve meeting released on Wednesday reflected a policy group that remains committed to staying the course, even as members expressed doubt about whether their policies were being effective in reaching their 2% inflation mandate. The dollar index is trading lower near 104.6 in consolidatory trade this morning. Yields on 10-year Treasuries are trading near 4.43%, while yields on 2-year Treasuries are trading near 4.88% as the inverse widens. The broader commodity sector found light tailwinds overnight, with crude oil prices 1% higher, and the grain and oilseed markets mostly higher as well.
First-time claims for unemployment benefits fell to 215K in the week ending May 18, down from 223K the previous week, and below analyst expectations of 220K. Nonetheless, the four-week moving average crept upward to 219.75K claims, up slightly from 218K the previous week. Continuing claims for the week ending May 11 rose by 8,000 to 1.794 million. The four-week moving average for continuing claims increased by 5,000 to 1.786 million. All of the above numbers still reflect a relatively tight jobs market. We saw a spike in weekly claims a few weeks ago, but then claims started to decline once again. The Federal Reserve would take notice if weekly claims pushed above 300K per week, but that’s not the case at this point, suggesting that we’ll once again have a solid monthly jobs report in a couple of weeks.
The Chicago Fed national activity index fell to -0.23 for April, down from -0.04 in March. This monthly index is designed to measure overall economic activity and related inflationary pressure. The three-month moving average for the index rose to +0.01 in April, up from -0.17 in March. The index continues to reflect a stagnant economy that has some strong areas and some weak areas – it’s not overly impressive, but it keeps chugging along, failing to provide the Fed a reason to cut interest rates. Yet, despite its sluggishness, inflation remains sticky, showing signs of popping higher if the Fed were to cut rates. We should see updated durable goods orders data for April tomorrow morning, along with the latest consumer sentiment numbers.
China punished newly inaugurated Taiwanese President Lai Ching-te for comments that he made as he entered office this week with a military blockade around the island nation. He stated that “Taiwan and China are two independent, separate countries” in his inaugural address, angering Chinese leaders. Chinese President Xi Jinping has promised to “reunite” Taiwan to the Mainland while Xi is in office. The question continues to be, will he prefer to do so before the U.S. presidential election, after it, or after the next presidential term. He would be 75 or 76 years old after the next U.S. presidential term. He’s already made needed changes to his inner leadership circle and to China’s constitution to facilitate the takeover attempt. The primary question is timing? The current blockade isn’t the first. China has implemented blockades previously, but this one is more severe than previous blockades, which allows the Chinese military to assess the Taiwanese responses and the effectiveness of the Chinese strategies. The blockades are generally designed to prevent the United States from providing assistance to Taiwan. China’s preference would be to take over Taiwan with its infrastructure supporting microchip production largely intact. Meanwhile, Taiwan’s legislative session opened in chaos, with members of both its ruling and opposition party getting into a brawl over several controversial bills that required several lawmakers to seek medical treatment. Thousands of Taiwanese citizens gathered outside parliament on Tuesday to express concern over the dysfunctional legislature, and the erosion of democracy by China-friendly parties.
Grain and oilseed prices continue to find good support on the breaks, with the primary story with legs under it being adverse weather in the Black Sea region. Dry weather is expected to stress 50% of Russia’s wheat by early June, with stress expanding during that time period to 75% of Ukraine. Together, these two warring countries are expected to account for a third of world wheat exports. The story gets even more intriguing now with stories emerging from Russia that authorities there are warning that adverse weather could increase food inflation risks. Russian President Vladimir Putin has his hands full trying to maintain domestic support for his war against Ukraine. He doesn’t need food inflation to increase social unrest. So, the question then becomes, do we see Russian production fall low enough to cause Putin to restrict exports to contain food inflation risks at home? That has the potential to dramatically alter world wheat trade. June is the critical month for the development of the wheat crop in Russia and in Ukraine. A change in the pattern could still gain back much of the lost yield, but continuation of the pattern could see losses intensify. Forecasters currently call for the pattern to continue into at least early June.
