October 2 – The government is open, as we start a new fiscal year, after Congress extended a lifeline in the 11th hour with a 45-day stopgap funding bill. Yet, we see little celebration on Wall Street this morning to start the month, with stock futures rather stagnant. It’s not that Wall Street was overly worried about a shutdown – it rarely does get concerned – but rather that it is more focused on monetary policy going forward. The VIX is elevated back above 18 as we start trading in the new week and the new month, with the dollar index trading higher near 106.6, putting it just below last week’s 10-month highs as Treasury yields remain elevated as well. Yields on 10-year Treasuries are trading near 4.65% this morning, while yields on 2-year Treasuries are trading near 5.11%. Crude oil prices are modestly higher in early trade, while grain and oilseed prices traded mixed to higher following Friday’s sharp selloff.
The Senate passed a stopgap funding bill Saturday night that had come from the House of Representatives to keep the government open for another 45 days. The House continues to work on its 12 appropriations bills, but the stopgap measure allows the government to stay open while it does so. Republicans and Democrats generally remain far apart on budget objectives, so there is little indication that the Senate will be willing to pass all 12 spending bills that come from the House. Negotiations will continue, but we very well may find ourselves in the same position in mid-November. Wall Street doesn’t get too worked up over a government shutdown unless it lasts for an extended period of time. The UAW strike now includes roughly 25,000 workers at the Big-Three automakers, after another 7,000 joined the strike on Friday. The UAW plans to continue expanding the strike the longer it goes without a labor contract with the automakers. That begins to impact many other supply chains and support businesses, having a greater impact on the economy than a partial government shutdown.
But Wall Street’s primary focus is on rising Treasury yields and the Federal Reserve’s next move in monetary policy. Yields on 10-year Treasuries continued to march higher last week – hitting fresh 16-year highs. Traders are focused on the likelihood or not of a monetary policy pivot by the Federal Reserve, although they ought to be much more focused on our nation’s rising debt in both the public and private sector, and the impact of such on interest rates, in my opinion. Nonetheless, the current focus is on Fed policy, with some policymakers still sounding a hawkish tone. Friday’s monthly jobs report will be closely watched for signs of a softening jobs market that might sway the Fed closer to a pivot, especially following last week’s favorable PCE inflation data.
The grain and oilseed markets flushed lower Friday after USDA released its quarterly stocks and small grains summary reports. In combination, the reports were not that bearish, so the market’s reaction says something about the sentiment going into the reports. The most bearish portion of the reports was the small grain summary, which pegged the all-wheat crop at 1.812 billion bushels, up 78 million bushels or 4.5% from USDA’s August estimate. That’s an unusually high jump in production between August and September, including more than a 9% rise in Kansas yields during that short period, as well as a 24% jump in Minnesota and a 43% yield increase in South Dakota. Yet, all wheat stocks on September 1 only came in 8 million bushels above the average trade estimate, and up just 24 million bushels year-on-year, suggesting that the increased production was nearly matched by an increase in feed usage, leaving little change to the bottom line. Yet, prices collapsed on the report, as traders focused on rising domestic and global supplies. Soybean stocks came in 26 million bushels above trade expectations, which may quickly disappear with lower yields in the October report, but their prices also collapsed lower. Corn stocks as of September 1 came in 60 million bushels lower than expected, suggesting stronger feed demand, but they too succumbed to the selling. The bottom line is that the market currently has a negative bias toward this sector. That could, and often times does, change by early to mid-October, but for now we need to recognize that bias. The focus now shifts back to private production estimates ahead of USDA’s October 12 crop report. That starts with StoneX releasing the results of its updated customer survey this afternoon.
Keep your eyes on USDA’s weekly export data over the next couple of weeks, starting with today’s export inspection report. The next three months provide prime shipping time for U.S. soybeans, with the tone typically set early in October. The next couple of weeks will tell us a great deal about the start of the Brazilian growing season, as well as China’s intentions regarding the purchase and shipment of U.S. soybeans. Rains in Center-West Brazil started late last week. Chinese buyers will be watching to see if we see more follow up rains this week.
