November 10 – Wall Street expects a higher open this morning, despite hawkish comments from Federal Reserve Chair Jerome Powell on Thursday. Traders are also noting that the White House announced that an agreement has been reached for Chinese President Xi Jinping to meet U.S. President Joe Biden in San Francisco next Wednesday. The VIX is still trading below 15 this morning, while the dollar index is trading near 105.8. Yields on 10-year Treasuries are trading near 4.58%, while yields on 2-year Treasuries are trading near 4.99%. Crude oil prices continue to bounce modestly following their recent collapse that saw them wipe roughly $20 off the price in 40 days. The grain and oilseed markets are mixed as they regroup following yesterday’s big USDA WASDE crop report.
Federal Reserve Chair Jerome Powell stated Thursday that the central bank is “not confident” that interest rates are yet high enough to finish its battle with inflation. He went on to say that the central bank would not hesitate to tighten policy further if they deemed it necessary. Powell is trying to convince the markets that he remains hawkish, in my opinion, because he believes that an economy that thinks the Fed is about to pivot will jubilantly spend again, reviving those inflation fires as it does so. There’s still enough surplus cash in the system to help that happen, although those surplus supplies are rapidly shrinking. We may see the Fed push rates higher if it feels necessary to do so, but the bigger story near-term is likely whether we can get the government funded beyond next Friday without another credit downgrade that could send interest rates higher again, doing more of the work for the Fed. It’s only a matter of time, in my opinion, before we see a downgrade by Moody’s, and that may be just the beginning considering the current spiral of borrowing money to pay the interest on our rapidly developing debt problem.
Crop stress is expected to expand to up to 40% of Brazil’s soybean belt in the coming week as readings soar above 100°F amid a lack of rainfall. Forecast models continue to show good rains across the dry Center-West region of Brazil in the 11- to 15-day period, which would narrow the area of stress to just 15% f the belt, but this region is all too familiar with promises of rain 10 days out that don’t verify forward in the forecast. Traders will be anxious to see how these weather maps evolve over the coming weekend. Again, I repeat that statistically there is very weak correlation (0.09) between rainfall in Center-West Brazil in November and final yields. But that doesn’t mean that there can’t be significant damage in any particular year. I want to caution against getting caught up in the hype currently on social media, but I also know that it takes rain to make a crop. Satellite NDVI scores for Mato Grosso slipped below average this week, but they remain slightly above year ago levels at this point in the growing season, and roughly in the mid-range of the past 20-year history.
The market is a bit less concerned about Brazil following Thursday’s USDA WASDE crop report that raised the U.S. yield, adding another 25 million bushels to the bottom line. That gives a little more margin for error in the event that supplies do run out in Brazil ahead of next year’s U.S. harvest. Keep in mind that Brazil still has notable supplies of old-crop soybeans that it will carry over into the new marketing year. The StoneX Brazil team estimates those old-crop surplus stocks at 170 million bushels, which is significant for them. They estimate that a “normal” crop in the current growing season could see those stocks grow to 310 million bushels in the coming year, but again, that’s assuming a normal crop, which hasn’t been determined yet. Chinese state buyers have been actively chasing the U.S. market this week on fears that Brazil might have a short crop. However, private crushers have been very patiently waiting to see how the Brazil growing season plays out. The question is, will the state buyers now step back from the market since USDA has increased its view on the available U.S. supplies, or will it take advantage of the price break to continue its buying spree?
The grain and oilseed markets were relatively calm overnight, following active selling on Thursday after USDA issued what was construed to be a bearish crop report. USDA increased the size of the U.S. corn crop by 170 million bushels, and then increased demand by 125 million bushels to keep ending stocks below 2.2 billion bushels. But there is still nothing bullish about ending stocks at 2.1 billion bushels. The next best opportunity short of a black swan event to excite the bulls would be a weather problem for Brazil’s safrinha corn crop that won’t be planted for several more months. USDA bumped Russian wheat output by 5 million to 90 million metric tons, but the market had largely already been trading a similar figure. It largely offset much of that increase with cuts to production in India and Argentina. The USDA attaché in India is several mmt lower than USDA’s revised number, providing more fodder for the argument that India may need to become a notable importer at some point, which could help to absorb some of the excess supplies coming out of the Black Sea. Quality problems continue to mount with Brazil’s crop as well, which will likely increase its need to import milling wheat in 2024, so wheat has some potential developing stories – just not yet a factor for the market with large supplies of cheap wheat currently flowing from the Black Sea.
