Perspective: Morning Commentary for April 21

By: Arlan Suderman, Chief Commodities Economist

Fri, 21 Apr 2023, 13:41

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

April 21 – Stock futures are mixed this morning following a busy week of earnings reports. Earnings will continue to be a factor, but Wall Street will also increasingly focus on expectations for Federal Reserve actions the week after next. Stocks still have a positive bias to them, while the opposite has generally been true for the commodity sector, reflecting a bit different focus between the two sectors currently. Meanwhile, the VIX is trading near 17 – just above recent 15-month lows – reflecting few signs of fear on Wall Street. The dollar index slipped lower with Treasury yields overnight, with the greenback currently trading near 101.7. Yields on 10-year Treasuries are trading near 3.51%, while yields on 2-year Treasuries are trading near 4.10%. Crude oil prices slipped deeper into the April 3^rd chart gap earlier in the session, but they are currently bouncing off the 100-day moving average to trade 1% higher. The grain and oilseed sector was mostly lower in overnight trade.

Stocks plunged lower on Friday in China as worries about China / U.S. economic decoupling were increased by reports that the Biden Administration is about to release a new order to further restrain U.S. investment in China. The new rules are expected to target microchips and other sectors critical to the Chinese economy. Chinese traders listened intently to U.S. Treasury Secretary Yellen’s speech yesterday that seemed to be targeted toward calming investors while continuing to move forward with decoupling. That was followed by comments this morning from Retired Air Force Brigadier General Robert Spalding who stated, “If China invades Taiwan, we’re going to see an economic cut. It’s probably better that we start planning for it now.” He went on to say that he expects an eventual Chinese invasion of Taiwan, and that, “The Chinese have been planning for this decoupling and we’ve been fighting it. We don’t want to acknowledge it.” He was speaking to CNBC when he made the comments, which was focused more on the equities. But the I implications for the commodity sector are much greater, as China is the world’s largest importer of commodities.

Wall Street is resigned to another Fed rate hike in early May, but it believes that will be followed by a pause, followed by rate cuts. Traders believe that the economy can withstand that without any additional significant pain. Commodity traders see a bit more risk with that scenario, believing that it will lead to further demand destruction that necessitates lower prices to reduce production and stimulate demand. That’s obviously truer for some commodities than it is for others, but the funds paint with a broad brush when they make these investment decisions. Bull markets are followed by bear markets, and bear markets are followed by bull markets. That’s no secret. The challenge is assessing the scope of the move and the timing of the pivot – be it stocks or commodities. The low level that the VIX – Wall Street’s fear index – is currently trading suggests that stock traders feel well positioned currently in the stock market until / unless new information emerges to suggest additional downside risks.

As for the commodities, those involve other variables on both the supply and demand side. Crude oil supply has been cut by 3.66 million barrels by OPEC+, while U.S. shale oil output is flattening. Now it’s a question of demand recovery and timing. Global demand is expected to rise by more than 2 million barrels per day this year, but much of that is contingent on the recovery in China, which is providing mixed signals. Travel will be a large component of that, accounting for the larger share of the demand recovery. Crude oil production takes time to recovery. It’s not just a matter of flipping a switch to recover output that has been shut down. The food-based commodities are largely on yearly production cycles. “Assuming” normal weather associated with a developing El Nino, I would expect both domestic and global corn and soybean balance sheets to grow over the coming year, while I expect the opposite to be true for wheat. We’ll still have tight domestic corn and soybean balance sheets until the next harvest five months from now, but then supplies should increase above currently anticipated demand levels. That doesn’t necessarily mean that we’ll be looking at burdensome supplies, but tightness should ease. However, global wheat stocks are expected to continue to trend tighter.

Active selling of corn and soybeans in Brazil due to this year’s significant production increases continues to create headwinds for those commodities, while the funds continue to favor the short (sold) side for wheat. Kansas City wheat prices have struggled after failing to take out the $9 level on Tuesday amid improving forecasts for the dry southwestern Plains. It’s too late to bring most of that crop back, which will contribute to further declines in U.S. and global wheat supplies. But that’s a story for another day when Russia continues to dump cheap wheat on the world market. I’m already seeing warnings of corn yield drag due to late planting in the Midwest, but it’s just April 21^st. There’s plenty of time to get this crop planted, and the forecasts certainly look more favorable going forward than they once did. As for that yield drag, that’s far truer for the Dakotas than it is for Illinois, so we need to keep our eyes on the northwestern quarter of the belt. I’m certainly not pushing the panic button, but we do need to see the forecasts stay dry for a while, as the most productive land in that region tends to dry slowly unless you get some warm winds in the area.

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