November 20 – Stock futures pushed quietly higher overnight as traders continue to digest Donald Trump’s cabinet picks, while also positioning for Nvidia’s earnings report due after the bell this evening. The VIX is trading below 17 this morning, while the dollar index remains strong near 106.7. Yields on 10-year Treasuries are trading near 4.42%, while yields on 2-year Treasuries are trading near 4.30%. Crude oil prices are nearly 1% higher in early trade, while the grain and oilseed markets were all in the red overnight.
President-Elect Donald Trump nominated Howard Lutnick to head the Commerce Department on Tuesday. Lutnick is a Wall Street CEO who also co-chaired his transition team. The Commerce Department has a wide array of responsibilities, overseeing everything from the U.S. Census Bureau to investment promotion, to weather forecasting. But most importantly here, the Commerce Department has authority over export controls, while also managing the U.S. tariff program on trade. Trump 1.0 used the Commerce Department to implement tariffs on China, while President Biden continued those programs to a great extent – even adding to them. In fact, the Biden Administration used the Commerce Department extensively to issue sweeping export controls on advanced computer chips and chipmaking equipment that might be going to China. Lutnick doesn’t speak much about China, but he is seen as a major proponent of tariffs, especially those aimed at China. The Trump transition team also noted that he would be given oversight over the U.S. Trade Representative when appointed.
Chinese President Xi Jinping is in Brazil for the G-20 meetings this week, with President Biden currently in attendance as well. Xi is expected to sign a significant trade agreement with Brazil while there, which may be meant to send a message to Trump as much as it is anything else. Both countries are founding partners in the BRICS coalition. Brazil is a major supplier of agricultural commodities needed by China, and China is a major supplier of consumer goods desired by Brazil as its economy grows, including electric vehicles. In fact, EVs produced by China’s BYD brand currently dominate market share within Brazil. EV production and sales represent a sector that China has chosen to build its economy around going forward. China desires Brazil’s agricultural commodities that allow it to continue deleveraging from dependency on the United States. The details of the agreement have not yet been released, but here's what we can expect. Previous agreements China signed with the United States typically were more ceremonial than they were meaningful. They rarely committed China to buy more than they were planning on purchasing anyway, and they typically lacked detail that would hold China accountable. In reality, China has been moving toward greater dependency on Brazilian commodities for years. Brazil’s cheap currency makes Brazilian commodities cheaper to buy when they are available, and its annual expansion of production makes them more readily available, except for years when adverse weather curtails production. The bottom line is that the anticipated trade agreement likely to be signed as early as today has significance in what it represents – the shifting of trade allegiances away from the United States – but it really just reflects what was already occurring.
It's more of a tossup now whether the Federal Reserve will cut its benchmark interest rate again at its December meeting on the 18th. The market is currently trading expectations that we will just see two, perhaps three, rate cuts between now and June. That represents a dramatic shift in market expectations from two months ago when the central bank kicked off its rate cutting phase with a 50-basis point reduction. Central bankers allowed the market to think that there would be at least that much more in cuts before the end of the year, with perhaps four or five more cuts by June. Jerome Powell did all but declare victory over its fight with inflation at the Jackson Hole Symposium in late August, stating that its focus now was no the deteriorating job market. Suddenly, Powell is speaking now of a solid jobs market and lingering inflation concerns. No doubt policymakers are considering the implications of anticipated tax cuts, deregulation, and tariffs under Trump 2.0. Look for the Fed to roll out more analysis on what to expect going forward at the December meeting, although it will remain somewhat coy on the details until it sees how things play out in the months ahead. Don’t rule out the possibility of a rate hike at some point next year.
Donald Trump was elected president on November 5. Each day now that passes without China pushing the Taiwan issue gives greater confidence that Xi Jinping will likely wait until after Trump 2.0 to act, although the risk will remain with us going forward as a potential black swan event. In the meantime, we will continue to see Brazil grab market share in global trade for corn and soybeans, while domestic demand will hinge on policy direction impacting using these commodities and their products as a feedstock for liquid biofuel production. Managed money is currently leaning its support toward corn, while shorting soybeans, with little in the way of a meaningful weather threat currently at play in South America.
