October 22 – “Higher for longer” is again the theme on Wall Street regarding central bank interest rate policy perceptions. Global stocks came under modest pressure overnight as traders continue to dial back expectations for big rate cuts from the Federal Reserve as the U.S. economy remains resilient. The VIX is trading near 19 this morning, while the dollar index is trading near 104.0, after setting fresh 11-week highs on Monday. Yields on 10-year Treasuries are trading near 4.17%, after setting fresh 12-week highs earlier in the session, while yields on 2-year Treasuries are trading near 4.02%, as the yield curve continues to trend upward with greater steepness. Crude oil prices are modestly higher after re-establishing themselves above $70 on Monday, while the grain and oilseed markets traded mixed to weaker overnight, although they tended to firm into the pause this morning.
A lot of issues are currently pressing Wall Street traders, leading to a significant amount of uncertainty at a time when the major stock indices are trading just below record high levels. Treasury yields are pushing higher – currently at nearly three-month highs – as traders discount the likelihood of massive rate cuts over the next nine months to a year. There are now nearly one-in-three odds that we could see just one more 25-basis-point rate cut before the end of the year. At one point there was speculation that we could see 75 – 100 basis points of cuts. But Wall Street is waking up to the fact that the economy remains resilient, while we still have some lingering inflation embers that the Fed doesn’t want to stoke with too aggressive of a rate cut schedule. Meanwhile, a lot of consumers holding pent up demand for large ticket items, such as homes and cars, have been told by the markets to expect big rate cuts. As such, they’re delaying those purchases until they get those cuts, and they may have missed the opportunity already. Many businesses are holding off expansion plans, pending the outcome of the election.
Will China be able to sustain an economic recovery? It announced massive stimulus programs when the Fed cut its benchmark rate by 50 basis points in September, amid expectations of more aggressive rate to come. But now the Fed is sounding a bit more hawkish, and China will be more limited in what it can do. It continues to roll out stimulus announcements, and it has seen some positive signs of economic recovery. But the jury is still out on whether it will be able to turn the tide of pessimism among its consumers who have their eyes on the property sector. We’ve seen a spike in property sales on the stimulus programs, but thus far the sales amount just a percent or two of the available inventory, so follow-through will be important.
A landmark summit of BRICS nations is convening today through Thursday in Russia, at which Chinese President Xi Jinping is expected to sit down with leaders of more than 20 different countries to discuss economic and financial cooperation, facilitated by a new financial system that these leaders hope to further develop to replace the U.S. dollar in trade. A new payment system based on the yuan is a top agenda item at the summit, although some world leaders attending remain skeptical. China believes that the United States reached a level of economic superiority due to the dollar becoming the primary global currency following World War II, and it therefore wants to replace the dollar with the yuan. In fact, China announced a new deal to construct six container ships for Canadian shippers with payment in yuan. It’s noteworthy that Saudi Arabia’s Crown Prince Mohammed bin Salman was reportedly not in attendance, but UN Secretary-General Antonio Guterres and Turkish President Erdogan were on the guest list.
Chinese buyers aggressively committed to more than 40 cargoes of soybeans last week, which were split roughly in half between U.S. and Brazilian origins. The recent rains in Brazil were enough to spur active planting of this year’s soybean crop in Center-West Brazil, with more rains in the forecast. Brazilian farmers are now much more confident that they will produce a big crop, making them willing sellers of soybeans. They have sold 90% of last year’s crop and have now sold nearly 28% of the next crop amid fears that their big crop on top of a bumper U.S. crop raises the risk of even lower prices down the road. The Brazilian soybeans are being used to fulfil Chinese shipment needs for February and beyond. However, China has booked just over 25 million bushels for delivery in December and near zero purchases for delivery in January thus far. It’s expected to need 240 million bushels in December and another 200 million bushels in January. So, is that demand that could yet hit the U.S. market, or will China fill a significant portion of that demand from its reserves, like it did last year – only its reserves are bigger this year? It will likely be a combination of the two, leaving U.S. total exports falling short of USDA’s aggressive 1.850-billion-bushel target. Corn demand is in a much better position, with final demand likely higher than USDA’s target. The same may eventually prove true for wheat. Brazil’s soybean harvest may be late, giving us a few more exports, but the oilseed otherwise will struggle to find a story without a dramatic shift in the weather and/or demand outlook.
