October 20 – Elevated Treasury yields and escalated Middle East tensions weighed on stock futures overnight. The VIX traded above 21 this morning, reflecting the elevated fear levels on Wall Street, while the dollar index traded near 106.2. Yields on 10-year Treasuries are trading near 4.94%, after failing to probe the 5.00% level on Thursday, while posting fresh 16-year highs. Yields on 2-year Treasuries are trading near 5.11%, after briefly probing to fresh 17-year highs near 5.26% on Thursday. The inversion between the two is nearly erased as the long end of the yield curve continues to out-perform the near-term, reflecting expectations for rates to remain “higher for longer,” while also reflecting the reality of the new debt-driven world that we live in today. Crude oil prices are nearly 1% higher this morning on the rising Middle East tensions, while the grain and oilseed sector is mixed.
The U.S.S. Carney shot down missiles and drones on Thursday that were believed to have been launched by Iran-backed Houthi Forces. The Carney was stationed just south of the Suez Canal in the Red Sea at the time that it engaged the missiles and drones. Reports indicate that we do not know that the missiles and drones were targeting the Carney. They may have been on their way to Israel. But the Carney shot them down because they were close enough to be considered a risk and a threat. This is in addition to drone attacks on U.S. forces in both Iraq and Syria. The increase in attacks comes as the war between Hamas and Israel intensifies, increasing the risk that the conflict will become more regional in nature, involving more countries. The Pentagon issued a veiled warning that the United States will take “all necessary actions” to defend U.S. and coalition forces against any threat, and that such response, should it occur, will “come at a time and in a manner of our choosing.” The bottom line is that risks are escalating in the Middle East, and not easing. That has the VIX trending higher, reflecting the rising anxieties on Wall Street that impact money flow as well.
The Middle East war adds one more complication for Federal Reserve members to consider when they meet to discuss monetary policy in less than two weeks. These central bankers love to say that they are “data driven,” but they also increasingly face factors that are difficult to put into data. Increased fear and uncertainty doesn’t show up in the data as clearly as they would like, but it has a negative impact on the economy, nonetheless. That’s a big reason why Fed fund futures trading places 98% odds this morning that the Fed will not change its benchmark interest rate on November 1st, although they still give one in three odds of a rate hike by January. And it’s not just the Middle East war that has policymakers concerned. They’re also focused on the fact that the long end of the yield curve continues to trend higher as the supply of debt certificates increases relative to demand for them, which has a negative impact on the economy as well. Another risk factor is the possibility of a government shutdown on November 17 if the House and Senate are unable to agree on a funding bill(s). The House of Representatives is still trying to elect a leader, although an acting leader is in place for now. But that doesn’t deter the fact that the House and Senate are still far apart on spending objectives. Perhaps the greater risk here is another credit downgrade from the whole circus of affairs in Washington, that would also impact the economy negatively. On the other hand, the Fed has made it clear that it does not want to risk pivoting policy before it is convinced that inflation will come all the way down to the 2% mandate. As such, a combination of the above is largely why the Fed is expected to hold the line on policy when it meets the week after next, and perhaps beyond that.
China’s central bank kept its benchmark lending rate unchanged at 3.45% today, as policymakers allow the system to play out, disappointing stock traders. Recent economic data reflected positive momentum for consumption portions of the economy, including factory activity, whereas the property sector continues to face serious challenges. Furthermore, S&P Global estimates that China’s small regional banks could suffer a capital shortfall of 2.2 trillion yuan ($301 billion) from the deepening local government debt crisis. China’s central government is expected provide a safety net for these local government units, keeping the risks of a broader financial crisis in the property sector / local governments low.
Chinese domestic soybean crush fell to 1.48 million metric tons last week, after spending much of the third quarter above 2 mmt per week. Year-to-date crush for 2023 totaled 73.96 mmt, up 7.5% or nearly 5 mmt above last year’s pace. However, soybean imports year-to-date through September total 78.82 mmt, up 9.7 mmt from the previous year and roughly 5 mmt above crush needs, allowing China to rebuild its reserve levels. Buying levels for November to January shipment still remain low, meaning that buyers still have many decisions to make in the weeks ahead that could impact the U.S. balance sheet in one of two ways. A shift back toward greater dependency on U.S. soybeans would be supportive, while a resurgence of Brazilian purchases could be bearish. Buyers tell us that much of that decision hinges on Brazil’s early growing season weather. This morning’s models still call for good rains next week in dry areas of the Center-West region, but they are once again trending drier, raising fears that they will disappoint once again.
