September 19 – Stock futures have a cautious tone to them as the Federal Open Market Committee begins two days of policy meetings. The VIX is trading near 14 this morning, while the dollar index is trading near 105.0, which is just below its recent six-month highs. Yields on 10-year Treasuries are trading near 4.36%, which is on the cusp of new 16-year highs, while yields on 2-year Treasuries are trading near 5.09%. Crude oil prices are on the cusp of one-year highs just below $94 per barrel on supply concerns as demand continues to exceed expectations as U.S. output slides. Grain and oilseed prices were mostly weaker overnight as harvest gains momentum in the Midwest.
The Federal Reserve’s monetary policy committee begins two days of meetings this morning to discuss its next steps. Fed Chair Jerome Powell has done a masterful job of producing unanimous decisions over the past couple of years, but that’s likely to become more challenging going forward. The doves were willing to go along with aggressive rate hikes when inflation was high, but now it may be more difficult to keep them onboard with headline inflation getting closer to the 2% mandate. Powell and the hawks on the committee (seems strange to put Powell in the same camp as the hawks) are more concerned about pivoting too soon, as the central bank did in 1980. He stated repeatedly in the past that they’d rather error on the side of too high for too long than pivot too soon. I anticipate that the way to get a unanimous agreement one more meeting will be to pause the rate hikes this meeting, but to combine that with a hawkishly-construed policy statement to keep the door open for at least one more rate hike to come, with emphasis on rates holding strong through much of next year.
China’s yuan remains quite weak at near 7.3 yuan to the dollar ahead of tomorrow’s Fed statement. The strong dollar that is a product of the Fed’s rate policy creates a lot of challenges for the yuan at a time when China would prefer that it would be stronger, but it has its own economic challenges that require stimulation – especially for the property sector. We’ve seen some encouraging data coming out of China in the past several weeks, but China is far from working its way out of its current economic slump, in part due to the continued deleveraging of western countries. China’s central bank met with big name international firms on Monday – many of which seem to be withdrawing support for investment in China. A recent survey of U.S. firms in China revealed that optimism about investment in China continues to decline. Forty-eight percent of the 325 firms surveyed held a negative outlook about their developments in China over the next five years, while 40% indicated that they were shifting supply chains and investments away from China, up from 34% a year ago. Only 17% of the surveyed firms indicated that China was their first option for investment in the global market, down from 27% in 2021. One-third of the respondents indicated that China’s policies and regulations toward foreign companies were less friendly than a year ago. Chinese regulators pledged that they would continue to improve the business environment for these foreign firms, but they have thus far been unsuccessful in doing so.
The United Auto Workers union says that it will expand its strike against the big three automakers if no agreement is reached by Friday. It said Monday that it will not allow the automakers to drag this conflict out, but it will rapidly expand the strike to more plants. That may be what the automakers want, to test the union’s ability to finance a strike at all three automakers at one time. The union pays its workers to walk the picket line, so there is a limit to how long it can take an extended strike for workers across so many plants. That’s why the union typically strikes at just one company at a time. Regardless, the strike is expected to provide a drag for the U.S. economy as it expands, which will likely contribute to the Fed’s expected decision to pause its rate hikes at this week’s policy meeting.
U.S. crop ratings continue to leak lower as the crops mature, with my corn yield model now at 171.0 bushels per acre and my soybean yield model at 50.0 bpa. The official StoneX yields are currently at 175 and 50.1 bpa respectively, with the next update coming on October 2nd when we complete the next customer survey. But the trade is increasingly more concerned about weak export demand. China bought another 15 cargoes of soybeans last week, down from 18 the previous week, and down from 35 plus in previous weeks. Nearly all of the purchases were from South America, which has booked more than 200 million bushels for shipment to China for the fourth quarter of this calendar year, reducing the need for U.S. soybeans during our peak shipment time. Traders are monitoring the strength of El Nino, with expected implications Argentine and Brazilian production. Argentina’s production is expected to surge in the coming year, but what about Brazil? Forecast models call for below normal rainfall for Brazil throughout its soybean growing season. But it normally gets far more rain than needed to produce a crop. It could still see a short crop, but the big El Nino years of ’97-98 and ’15-16 produced trend and above-trend soybean yields. As such, I can’t discount the possibility of a short Brazilian crop, but neither can I assume that it will happen, just because the monsoons start late and are weaker than normal.
