May 23 – Stock futures were subdued this morning amid frustration that the debt ceiling talks have yet to produce much progress, despite all the positive rhetoric coming from both sides. Yet, the VIX continues to trade near 18 this morning, reflecting slightly elevated fear levels on Wall Street, but certainly no signs of panic. Yet, the dollar followed Treasury yields higher, with the greenback trading above 103.6 to a fresh two-month high. That follows a move of yields on 10-year Treasuries to fresh two-month highs near 3.76%, with yields on 2-year Treasuries at two-month highs near 4.40%. Positive money flow started coming into the broader commodity sector this morning about 6 a.m. Eastern Time, lifting crude oil more than 1% higher, with the grain and oilseed complex mixed to higher as well.
A deal to avert a debt ceiling crisis remains elusive, with Treasury Secretary Janet Yellen stating that she can maneuver funds around to avoid default for another 8 or 9 days, but that’s it. The two sides remain far apart, with President Biden wanting to increase taxes on the wealthy, on oil companies and on pharmaceutical companies to reduce the deficit, while the Republican-controlled House is asking for reductions in spending growth. The White House reportedly offered to freeze spending at 2023 levels in the 2024 fiscal budget, while Republicans are wanting to pull back unused Covid funds and to freeze spending at 2022 levels that were still elevated due to Covid. It’s not a surprise that there is not yet a deal, because each side has the highest leverage just before the deadline, but that’s also playing with fire – most notably that we could see the U.S. credit rating cut before we ever get to the deadline due to the impasse. That alone would increase interest rates for both federal and private debt, and it could take as much as 0.5 points off gross domestic product, in addition to being inflationary. Any deal that is reached must pass the Republican controlled House where they hold just a 9-member advantage, as well as the Democratic controlled Senate where they hold a 2-vote advantage. As such, any compromise that is reached must appeal to the middle, and very little middle exists in today’s political world. Therein lies the risk as the calendar counts down to a June 1st deadline.
The war intensifies in Ukraine, with Russia claiming its first major victory in 10 months by capturing Bakhmut in eastern Ukraine. However, the capture came at a great price for Russia, both in human lives and in equipment resources. That left it vulnerable to fighters who infiltrated the Russian border into Graivoron, where residents fled for their lives. The incursion group claims to be a Russian rebel group intent on overthrowing President Vladimir Putin, while Russia claims that it is a group of Ukrainian fighters. The cross border fighting angers Putin, as does the support that Ukraine received last week from G-7, which included F-16 fighter jets that have the capability of flying deep into Russia as well. Some analysts say that Ukrainian pilots have been training at several U.S. airbases for months, and that the F-16s could be available as early as Friday, despite official statements that they may be available by September. The G-7’s gift of the F-16s comes with a requirement that they not be used to cross the border into Russia, but some military experts believe that is a “wink and a nod” to provide cover, and to keep Russia vulnerable without protection of key targets. After all, it wouldn’t make strategic sense to start the long-anticipated spring counteroffensive without striking the supply lines and ammunition dumps that would support Russian troops.
All this of course takes place within the fog of war where on doesn’t know what to believe, but I say it to say that we could see a significant escalation of the war in the weeks and months ahead, with potential implications for the commodity markets. The Black Sea Region is still a major supplier of commodities to the world, but most of the risk premium has been removed from the markets due to recession worries. Demand for commodities relative to supply is soft currently, but that supply could change quickly amid these geopolitical risks. It’s an ongoing risk that must be monitored constantly. Coincidentally, Russian Prime Minister Mikhail Mishustin unexpectedly arrived in Shanghai to attend a high-level Russia-China Business Forum, along with a number of sanctioned Russian tycoons, including individuals from key fertilizer, steel, and mining sectors. Russian Deputy Prime Minister Alexander Novak, who handles energy issues for Putin, was also reported to be present. The group is expected to travel to Beijing following the forum to meet with Chinese President Xi Jinping and to sign a series of deals on infrastructure and trade, including the construction of Russian designed nuclear power plants within China.
Monday afternoon’s USDA Crop Progress report confirmed that corn and soybean planting is well ahead of normal for most of the Midwest, which tends to increase acreage, especially for corn. North Dakota is the lone laggard due to lingering wet conditions there, which may result in a million or so prevent-plant acres there. However, that may be at least partially offset by increased acreage elsewhere. Then is also comes down to how many row crop acres we pick up from failed winter wheat acres in the central and Southern Plains, where abandonment is heavy. Some areas saw the majority of their wheat acres burned down for planting a row crop, or for fallow for a fall crop.
