September 22 – Money flow cautiously returned to the commodity and equity sectors overnight following a “risk-off” session on Thursday after the Federal Reserve sounded a hawkish tone on Wednesday afternoon. The VIX pulled back to 17 this morning, after pushing to a one-month high near 18 on Thursday. The dollar index continues to follow Treasury yields higher, with additional support from a more dovish than expected Bank of Japan policy statement. The dollar index is trading near 105.5 at this hour, after reaching a fresh six-month high near 105.8 earlier in the session. Yields on 10-year Treasuries are trading near 4.48%, after reaching fresh 16-year highs near 4.51% earlier in the session. Yields on 2-year Treasuries are trading near 5.13%, after hitting a fresh 17-year high above 5.20% on Thursday. Crude oil prices are nearly 2% higher in today’s early action, while the grain and oilseed markets are mostly higher as well.
Wall Street is adjusting to new expectations this week of interest rates that are “higher for longer.” This is a product of the Federal Reserve’s insistence at maintaining a hawkish stand to avoid pivoting too soon, as well as the rapidly rising national debt. The Federal Reserve continues to shrink its balance sheet, in addition to sustaining its talk of higher interest rates, reducing the amount of Treasury certificates that it buys by $1.14 trillion per year. That’s in addition to a reduction in debt certificate purchases by our top two foreign buyers – Japan and China. Combined, the reduction in demand for debt certificates is moving closer to $1.5 trillion at a time when Congress keeps adding about $1 trillion to the supply of debt certificates. The combination of the need to attract new buyers for all of these additional debt certificates and Fed monetary policy results in Treasury yields continuing to trend higher. That then leads to a stronger dollar, creating more challenges for those nations with large amounts of dollar denominated debt, but also creating more challenges for China, which is still in stimulus mode.
The White House is expected to tell federal agencies today to prepare for a government shutdown. The House of Representatives has not yet been able to reach an agreement to fund the government beyond September 30, let alone agree to a bill that would pass the Senate. We’ve seen a partial shutdown of the government a dozen times since 1976, with the longest of them lasting 34 days in late 2018 extending into early 2019. It would be a partial shutdown because all “essential” services would continue. The primary factor holding up a spending bill to fund the government is a group of representatives in the House who are using the current crisis as leverage to force cuts in spending to start addressing our nation’s debt problem. The market assumes that we’ll get through this, with little significant harm to the economy, but I believe that it will truly come to a head when Congress must reach a new debt ceiling agreement immediately after the 2024 elections. Congress’ choices at that time will be higher taxes, spending cuts, or monetizing the debt by creating money to buy its own debt certificates. We’ll likely see a combination of the three.
Mexico hiked import tariffs by 5 to 25% on a total of 392 products effective August 16, impacting nearly 90% of Chinese exports to Mexico. Mexico and Canada are the primary trading partners for the United States, but Mexico has also become an important destination for Chinese products in recent years – often to re-export them to the United States. This comes as trade restrictions escalate between China and the European Union, with the latest development including the EU’s anti-subsidy investigation into Chinese exports of Electric Vehicles. Germany is also reportedly considering restricting the use of Chinese telecom equipment made by ZTE and Huawei in its mobile networks. That could provide another blow to China’s struggling economy. China’s foreign direct investment (FDI) reached $116 billion in the first eight months of this year, down more than 11% from $131 billion in the same period last year, with growth of FDI turning negative since April. In fact, China suspended reporting FDI from the United States this summer, suggesting that there’s been a much sharper decline, adding to the geopolitical tensions.
Water exports are slowly increasing from Ukraine. Two ships have now safely departed from Ukraine’s ports utilizing its humanitarian corridor, carrying a total of 20K metric tons of products. Three more vessels are said to be moving towards these ports to be loaded with agricultural products and iron ore, with a combined capacity of 127K mt, with the goal of carrying their cargoes to China, Egypt and to Spain. The expectation is that other shippers will be emboldened to do the same if nothing happens, releasing more bulk commodities onto the world market. The question remains, will Russia allow this to happen? Ukraine also appears to be getting closer to working out negotiated solutions for moving its Ag commodities to the west overland, although these agreements will likely take time, and additional subsidies as well. But the West continues to funnel money to Ukraine that it could choose to utilize for the subsidies. The West does not want to see Ukraine’s agricultural production capabilities grind to a halt, which would eventually be expected to result in global food shortages.
