Perspective: Mid-Day Commentary for May 8

By: Arlan Suderman, Chief Commodities Economist

Mon, 08 May 2023, 15:50

Perspective: Midday Commentary

Guest Commentary by Mike Castle

Market Intelligence - Fertilizer Analyst

May 8 - It's a relatively quiet day on Wall Street, with stocks moderately lower at mid-day while the VIX trades near the 17.5 level. The dollar is rebounding from the morning's lows, now slightly in the green above 101. Treasuries have softened through the morning, though still up on the day, with 10-year yields trading near 3.49% while 2-year yields trade near 3.96%. Strength in crude oil prices remain, with the nearby WTI contract up over 2.5% at the time of writing to trade near the $73 level while the ags remain largely mixed.

U.S. Consumer Inflation Expectations declined to 4.4% for the year-ahead horizon in April, down from the 4.7% seen in March and coming in slightly below forecasts of 4.5%. It was a good sign to see this dip after March saw the first monthly increase since October. The decline was driven in part by expectations for an easing of increases in the cost of a college education and food, while expectations for increases in the cost of medical care and rent remained unchanged. Consumers did raise their expectations for gas prices to increase in the year ahead, however, now expecting a 5.1% rise versus the 4.6% seen in March. Additionally, longer-term outlooks worsened slightly, with U.S. consumers now expecting three-year inflation of 2.9% and five-year inflation of 2.6%, both a 0.1% jump from the month prior. Expect inflation to come back into the spotlight this week as today's report comes ahead of the more important April U.S. CPI and PPI readings due to be released this Wednesday and Thursday, respectively.

Europe's largest economy showed unexpected weakness, with German industrial production falling 3.4% month-on-month in March, much sharper than forecasts of a 1.3% decline. This was a reversal from back-to-back gains seen in January and February and marks the largest drop seen since early 2022. The decline was mostly driven by negativity in Germany's coveted automotive industry, with manufacturing of motor vehicles and parts falling 6.5% in March after significant gains the month prior, though construction, machinery and equipment manufacturing, and production of capital goods all saw declines in March as well. This is raising recession fears again, though Germany's economy narrowly avoided a technical recession with their Q1 GDP remaining unchanged from the quarter prior after contracting 0.5% in Q4. The concerns are shared elsewhere in Europe as well, with Sentix's Euro Zone Investor Confidence Index unexpectedly plunging to -13.1 in May versus expectations of a climb to -8. This was the worst sentiment seen since September as European's outlooks continue to sour in the face of rising rates by the ECB. With the global economy being so tightly connected, it's important for us to be mindful of economic health around the world as issues elsewhere will eventually be felt here in the U.S.

U.S. and Chinese diplomats met in Beijing on Monday to discuss the recent challenges between the two sides and place an emphasis on stabilizing ties. U.S. Ambassador to China Nicholas Burns met with China's Foreign Minister Qin Gang, with Gang saying China's top priority is to "stabilize Sino-U.S. relations" in order to "prevent any accidents between China and the U.S." Gang's comment highlights a very noteworthy point when it comes to the impact of U.S./China tensions on commodity markets--with all the flexing on both sides, the risk of a small mistake setting off something much more major grows. For example, stepped up military presences in the South China Sea from both sides following the back and forth over U.S./Taiwan relations are raising the chances of such incidents, even if unintentional. We've seen how sensitive commodity markets have become to headline risks amid this environment of growing geopolitical tensions and with China being the top destination for U.S. ag exports, any potential incident could have a tremendous impact. While it's a positive sign that the two sides are pushing for more dialogue, tensions over Taiwan, China's relationship with Russia, and a multitude of other issues continue to simmer.

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