August 2 – Stock futures fell and the VIX rose overnight following a Fitch downgrade of its U.S. credit rating. The VIX traded above 16 overnight, it’s highest level in nearly four weeks, but it has since settled lower to trade near 15. The dollar index is trading at a new three-week high near 102.5, while yields on 10-year Treasuries are trading near 4.09% and yields on 2-year Treasuries are trading near 4.90%. Crude oil prices are modestly higher, having posted fresh 15-week highs in early trade. Grain prices surged higher overnight on another Russian attack on Ukraine export infrastructure, but prices have come well off their highs this morning on the reality of ample current grain supplies.
Fitch downgraded U.S. government debt late Tuesday to AA+, down from AAA previously. “In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025,” according to a statement released by the credit rating agency. The downgrade means higher interest rates on both public and private debt. I warned of these risks when the bipartisan debt ceiling agreement was reached. That agreement suspended the debt ceiling until January 1, 2025, which is after the next election. That means that the next agreement will need to be reached by a lame-duck Congress, and possibly a lame-duck president. That means that one of the most significant decisions regarding our nation’s future may be determined by people no longer accountable to voters; be it good or bad.
The U.S. national debt currently stands at $32.7 trillion, with annual interest payments estimated to be $651 billion, which is up nearly $300 billion over the past year as interest rates rise. The full impact of the rate hikes have not yet been fully factored into annual interest payments, as some debt certificates at low rates still have not matured, requiring them to be rolled to the higher current rates. Our current annual interest on the debt compares to the $790 billion we spend annually on our national defense. USdebtclock.org estimates that maintaining the status quo will increase the national debt to $44 trillion four years from today, with annual interest payments of $2.8 trillion. That would far exceed the $912 billion estimated cost of national defense in four years, or the $1.8 trillion in annual Social Security payments, or the estimated $2.3 trillion in Medicare and Medicaid payments four years from now. In other words, it is expected to blow up our national budget in the next few years. There are three possible solutions to the problem, or some combination. The first option likely to be considered would be massive tax hikes that would reach everyone in America in one way or the other, doing significant damage to the economy. The second option would include significant cuts in programs, which neither political party has shown the courage to do. The third would be to monetize the debt, which is quite inflationary, possibly leading to the collapse of the dollar. The above estimates are for four years from now if we sustain the current path, but I see this as all coming to a head in those anticipated debt ceiling negotiations following the 2024 elections ahead of January 1, 2025.
Today’s ADP employment report indicated that the private sector added 324K jobs in July, down from 455K the previous month, but well above the 185K anticipated by analysts. This raises concerns ahead of Friday’s government jobs report, which analysts expect to show that the economy created 175K jobs in July. Today’s numbers reflect a solid economy with an ongoing tight labor market that maintains wage inflation pressures.
Russia strikes again, hitting Ukraine export infrastructure at both Odessa and at Izmail on the Danube River, just across the river from NATO member Romania. The strikes come the day after an Israeli ship led others through the unofficial blockade, bragging about the accomplishment. Russia would have looked weak had it not responded, and it did respond. Early reports suggest that significant damage was done at both locations, although we should get greater clarity in the days ahead. Russia appears determined not to allow Ukraine grain exports over water. The question now is, how far will it go to stop exports over land? It probably doesn’t have to focus a lot on that issue currently, because Ukraine faces enough challenges using those over land channels currently due to logistics issues, objections from Eastern European farmers, and the higher costs that discourage Ukraine farmers from even planting the next year’s crops.
Today’s forecast models continue the shift toward cooler and wetter for the Midwest corn and soybean crops. As such, I anticipate that we’ll start to see crop ratings stabilize again in USDA’s crop progress report on Monday, followed by bumps in ratings over the next couple of weeks beyond that. But the focus later today will be on the StoneX customer survey yield and production results. Those results are scheduled to be released a couple of hours after the markets close today. It will be the first of several private production estimates coming out ahead of USDA-NASS’s first production estimate of the year on August 11. These numbers are expected to set the tone going forward for the supply side of the balance sheet. The market should start focusing more on the new-crop demand side of the balance sheet once it has a handle on the supply side later this fall. Demand is currently a greater concern to me.
