October 23 – Stock futures again came under pressure overnight as Treasury yields reached new multi-month highs. The same scenario unfolded the previous night, but stocks rallied on positive earnings reports. Once again, we face higher Treasury yields and concerns about whether China’s stimulus will be enough to turn things around. The VIX is trading near 19 this morning, while the dollar index rallied to a fresh 12-week high of 104.5. Yields on 10-year Treasuries are trading near a fresh 12-week high near 4.25%, while yields on 2-year Treasuries are trading near 4.06%. Crude oil prices erased yesterday’s gains overnight on expectations that today’s weekly inventory report will show an increase in domestic stocks, while grain and oilseed prices also came under pressure.
Leaders of 36 nations continued talks at the BRICS Summit in Russia today on how they could build an alternative banking system based on the yuan with the intended purpose of weakening the West. Russian President Putin reaffirmed his friendship with Chinese President Xi Jinping. India’s President met with Xi after meeting one-on-one with Putin. The U.S. Secretary General is also present at these meetings. Putin and Xi are building an international coalition of nations that they hope will stand up to the United States, and one of the ways that they can do that is to exchange the dollar for the yuan in international trade. Not everybody is excited about doing so. Some nations are quite concerned about the inability of the yuan to freely float in international markets, leaving them exposed. Yet, it does reflect a significant shift in the global geopolitical landscape as East & West grow further apart amid increasing tensions between the two sides. Russia and China feel the momentum growing, and they are enticing other countries to choose a side. This has a significant impact on recreating trading relationships, increasing costs as shipping lines increase along with war risks.
Increased shipping costs contribute to a slowly growing reinflation sentiment on Wall Street. Yes, we continue to see risk areas in the economy, and one of those risks is the roll back of the Trump tax cuts next year. Recent industry surveys showed that some firms are holding back decisions on expansion until they see what happens in the election, which will have a significant impact on the tax and regulatory environment, as well as on consumer buying habits. But fiscal spending will likely go up under both candidates, although perhaps at a different pace. The annual cost of servicing our nation’s debt recently rose above $1 trillion, according to the Treasury Department. Add together what we pay for Medicare/Medicaid, Social Security, National Defense and servicing our nation’s debt, and it comes to more than $5.2 trillion. The total estimated tax revenues collected totals $4.95 trillion, and we haven’t even paid for most of the services that we’ve come to expect from our government, such as education, food programs, etc. This deficit spending squeezes the credit markets, while increasing costs for all of us, and neither party is currently pushing a plan to deal with it. That means more fiscal stimulus going forward, which continues to keep the inflation fires quietly burning in the background. That combines with escalating geopolitical risks to lead many investors to want to own the hard assets, which includes the commodities. It doesn’t mean that every commodity will rise, or that it will be a straight path. The fundamentals of supply and demand still matter, but these factors do tend to impact the level at which the market manages supply and demand.
Private production estimates for the 2025 Russian wheat crop are generally in the 80 – 85 million metric ton range, with a bias toward the lower end of that range. The estimates reflect expectations for back-to-back small wheat crops in Russia, following back-to-back bumper crops. This past year’s crop was short due to adverse weather, and the 2025 winter wheat crop is off to a poor start as well, drought continuing to be a factor. Portions of the region received enough rain over the past week or so to sprout seed that was planted in dry soils but follow up rains are currently not in the forecast, meaning that those sprouts are at risk of desiccation. The U.S. Southern Plains crop is also facing drought problems, with the development of a La Nina weather pattern expected to keep it under duress. Some model runs show significant moisture opportunities over the next two weeks, but the models are not in agreement, and confidence is currently quite low. Dropping down to South America, the picture has turned dramatically over the past couple of weeks. Rains erased drought concerns over nearly all of Brazil, and just the southwestern fringes of Argentina are currently dry. Argentina is probably most at risk of seeing dryness return, but it's very early spring there. As for Brazil, our team there expects a normal soybean crop that will be harvested late because it is being planted late. That doesn’t reduce the size of the crop, but it does delay Brazil’s export season, perhaps boosting U.S. exports a bit, but it also delays planting of the winter (safrinha) corn crop. That doesn’t mean that the winter corn crop will be hurt, but it certainly increases the risks that will be the case. That’s another reason why we’re seeing foreign end users reduce their risk exposure now by booking supplies of U.S. corn at what they perceive to be harvest lows.
