August 18 – Selling continued in stock futures overnight over rising fears of “higher for longer” interest rates and concerns about escalating economic problems in China. The VIX rose to fresh 12-week highs overnight as it trades near 19 this morning. The dollar traded near 103.7 this morning, posting fresh nine-week highs. Yields on 10-year Treasuries are trading near 4.27% this morning after coming within 1 basis point of hitting fresh 15-year highs on Thursday, while yields on 2-year Treasuries are trading near 4.94%. Crude oil prices are up just 1% this morning, despite reports of a suspicious fire at an oil depot at Russia’s Novo port, which was hit earlier this summer by a Ukrainian sea drone. Grain and oilseed prices are mostly higher in early trade this morning, as traders position for the weekend ahead when headlines will continue to flow out of the Black Sea, and ahead of next week’s Midwest crop tour that will coincide with a hot and dry period for crops in the region.
China’s economy continues to spiral, with negative news undermining consumer confidence. Chinese developer Evergrande Group filed for U.S. bankruptcy protection in New York as part of one of the world’s biggest debt restructurings, further contributing to mounting anxiety over China’s worsening property crisis and its resulting aftershocks for China’s weakening economy. Evergrande last made headlines when it faced a liquidity crunch in mid-2021, but it now joins other Chinese property companies in recent days who are struggling to meet debt obligations. The property sector makes up between a fifth and a fourth of China’s economy, with roughly 70% of average household assets tied up in property. We’ve seen companies accounting for 40% of Chinese home sales default on debt since mid-2021, with most of them being private property developers. A decline in the property sector directly hits consumer spending in China as they begin to worry about their own financial health. This comes at a time when authorities are trying to encourage domestic consumer spending to offset lost export demand from Europe and from the United States.
The Chinese property sector is now seen by some in the industry as a large black hole that continues to drag developers into it. Some analysts fear that the black hole is now too big for the central government to fill after being too slow to respond to the developing problem over the past couple of years. The absence of concrete stimulus programs from the Chinese government continue to send chills through the investment world. China has taken small steps designed to stimulate the economy, but its biggest problem currently is the lost confidence from both consumers and investors that continue to undermine any efforts made by the government. Its yuan is flirting with 16-year lows versus the dollar currently, undermining China’s efforts to sell the currency as a strong alterative option to the dollar as the world’s currency of trade. China’s central bank now faces pressure to stabilize the currency before it reaches record weakness versus the dollar, which again goes against its efforts to promote the yuan in world trade. There’s been plenty of talk coming out of China’s government, but little meaningful action to turn the economic ship around. China now has to worry about the chilling effect that this is having on overseas direct investment dollars (ODI) that it heavily depends on for growth. I am not one calling for the imminent collapse of China, as I have seen plenty of those forecasts come up empty over my long career. But I’m watching for what China’s leaders might do to distract its citizens from the domestic problems at home by redirecting them toward a “greater threat” overseas. That could contribute to further destabilization of U.S. China relations.
The market currently gives less than 10% odds of another Federal Reserve rate hike at its September meeting, although those odds grow to roughly 37% by the September meeting, with perceptions of big rate cuts next year starting to scale back. Historically, the Fed tends to cut rates fast when it pivots its policy, but it tends to do so when the market doesn’t expect it to do so. Wall Street has been expecting a pivot for much of the past year, and it has been wrong the entire time. Fed Chair Jerome Powell has been quite clear on the Fed’s objective. It would rather error on keeping rates “higher for longer” than pivoting too soon. Its primary focus is on the service sector, and the biggest concern in that sector is wage inflation. There are few signals currently available to suggest that the labor sector is softening. There are plenty of signals to suggest that such is coming, but none have yet materialized into a softer labor market. Thus the pause, but not the rate cuts. The risk would be that rising commodity prices, especially energy, could spark more rate hikes.
Grain and oilseed prices pushed higher overnight amid reports that Ukraine sought retaliation for this week’s Russian strike on its port facilities. Russia reports that a downed Ukrainian drone hit a building in Moscow. There are also unconfirmed reports of an oil depot fire at Russia’s Novo port, which also handles more than half of its wheat exports. Headlines will no doubt continue through the weekend, presenting risk for grain traders. The Midwest forecast remains hot and dry for much of the rest of this month, with industry representatives scheduled to tour Midwest corn and soybean fields next week to get a good look at crops. They will post a myriad of pictures on X, formerly Twitter, that will impact market sentiment. Many of those pictures will show crop damage, but the tour should better define the scope of damage.
