September 23 – Stock futures continued to reflect an upbeat attitude on Wall Street overnight as traders celebrate the Federal Reserve’s recent 50-basis point rate cut, while anticipating more cuts to come. The market is keeping a close eye on rising geopolitical risks in the Middle East, but thus far that has not quenched the rate-cut euphoria currently on The Street. The VIX is trading back above 16 this morning, while the dollar index firmed to trade near 100.9. Yields on 10-year Treasuries are trading near 3.76% as they continue to firm off last week’s lows, while yields on 2-year Treasuries remain soft near 3.60%. Crude oil prices traded mixed to firmer overnight, while the grain and oilseed markets were mostly higher on increased weather risks in major producing areas of the world.
Wall Street remains unconcerned thus far regarding the potential for a longshoreman’s strike on the East Coast and Gulf Coast. Yet, there’s been little progress toward a meaningful agreement, where the union is requesting a 77% pay raise over six years. The strike is expected to begin on October 1st if President Biden fails to intervene. He has thus far indicated that he will not step in, but Wall Street still anticipates that he will once the strike starts. That’s because the strike could cost our economy as much as $5 billion per day with an election just six weeks away. Either way, expect the consumer to pay – either due to the disruptions or due to higher costs for the goods that we purchase that come through the ports. Bulk commodity movement is not expected to be impacted, although commodities moving by container would be impacted.
China’s youth jobless rate for those who are 16 to 24 years old (excluding students) rose to 18.8% in August, up from 17.1% in July. That’s the highest youth jobless rate since December when the government adjusted how it calculated the unemployment rate. Fresh graduates are struggling to acquire meaningful jobs, with many of them settling for part time work. The focus of any government is typically on its old and on its young, for that’s where the political support or unrest can make a difference. Yet, China’s stock market posted modest gains today on expectations that the high youth unemployment numbers will help spur more aggressive government supported stimulus programs. It’s the expectation of the market that China’s government will be freer to initiate meaningful stimulus now that the U.S. Federal Reserve has begun an aggressive rate cut program. Lower U.S. interest rates allow China to be more aggressive without doing as much damage to the value of its currency. Officials indicate that they will be making comments about the economy. Previous announcements have disappointed, but there’s renewed hope that this one will hold more substance now that the Fed has turned aggressive with its cuts.
Fund managers are no longer comfortable holding large short positions in the grain and oilseed complex. That could change with the next headline, but there’s a general sense currently that lower interest rates should spur economic activity, increasing demand for commodities. Furthermore, several key production areas of the world continue to wrestle with adverse weather, and geopolitical risks are slowly rising as well. We did see some much-needed rainfall develop over dry areas of the U.S. Southern Plains over the weekend that should facilitate active planting of the winter wheat crop in that region in the days ahead. Those rains spread ease across many dry areas of the Midwest as well, benefiting late fall crop development, while also supporting winter wheat planting in the region. However, the Black Sea winter wheat belt continues to battle drought conditions, along with many areas of Argentina’s wheat belt, and wheat traders tend to focus more on Black Sea weather than they do U.S. weather. Another civilian ship carrying rebar was hit with debris from a missile attack near Odessa in Ukraine, but that does not currently appear to be anything like the wheat ship that was directly hit after leaving Ukraine earlier this month.
The European weather model consistently called over the past month for rains to start ratcheting up with the start of the monsoons in early October. Then they shifted drier over the weekend a week ago, before shifting wetter again over the past week. Like the previous weekend, they shifted drier again over the weekend, pushing the start of meaningful rains back to mid-October. Will they shift wetter again this week or is this indicative of what we saw last year when the rains never really seemed to want to move forward in the forecast, although Brazil still managed to produce a large crop – just not as large as it might have had it seen normal rainfall. Local private production estimates remain between 165 & 172 mmt, up from 149 mmt the previous year, so that indicates that concerns are still limited domestically. Yet, this is something that needs to be monitored. The atmospheric setup is much different in Brazil than it was a year ago, when we were in an El Nino weather pattern. This year we are in a developing La Nina weather pattern, which tends to favor good rains developing in Center-West Brazil. That would suggest lower weather risks for Brazil than we saw last year, but the market doesn’t want to dismiss the risk until it sees those rains actually verify.
