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Perspective: Morning Commentary for August 20

By: Arlan Suderman, Chief Commodities Economist

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August 20 – Stock futures slipped lower overnight amid rising commodity prices and higher Treasury yields. The VIX firmed to trade near 16 at this hour, while the dollar index trades near 98.7 after falling to a fresh three-month low this morning. Yields on 10-year Treasuries are trading near 4.70%, while yields on 2-year Treasuries are trading near 4.20%. WTI crude oil rallied to trade near $88 per barrel, while Brent trades near $94 per barrel. The grain and oilseed sector added to yesterday’s gains in overnight trade as well.

First-time claims for unemployment benefits fell to 206K in the week ending August 15, down from 212K the previous week and below the average analyst estimate of 211K. The four-week moving average for jobless benefits rose to 204K, up from 199.75K the previous week, but that’s still a very low number. Continuing claims for the week ending August 8 totaled 1.799 million, up 18K from the previous week. The four-week moving average rose 2,500 to 1.789 million. These are still good numbers overall with a longer-term trend lower with the job sector in good balance currently between open positions and those looking for positions.

The Treasury Department’s announced buy-back plan didn’t keep a lid on Treasury yields for long as they came racing back overnight to erase the previous day’s losses. A number of factors play into these rising rates that are more pronounced on the longer end of the yield curve. A big factor that I’ve been harping on for the past several years is the growing sovereign debt problem. It’s a global problem, but specifically, U.S. sovereign debt topped $40 trillion this week for the first time ever. The interest cost for servicing that debt is estimated to be $1.117 trillion this year. Think about that for a moment and let that sink in - $1.117 trillion in interest payments this year. We are literally borrowing money to pay the interest on the debt. The biggest financial obligation we have is Medicare/Medicaid at $1.989 trillion, followed by Social Security at $1.655 trillion and Defense/War at $946 billion. The above added together – including interest payments – totals $5.707 trillion, with much of the rest of the federal budget on top of that. Estimated tax revenues this year are $5.586 trillion. The current U.S. debt for the 109 million taxpayers in this country comes to $361K.

The total U.S. Federal budget for this year is $7.4 trillion. Estimated tax revenues are $5.586 billion, with tariff revenues and fees collected on top of that, resulting in a continually growing debt. The Treasury Department must issue debt certificates to fund that spending. Yields rise when the supply of those certificates exceeds the demand. Both in 2008 and again in 2020 the Federal Reserve pushed interest rates down by buying up a large portions of those debt certificates so that the demand for them exceeded the supply, but that also pumped trillions of dollars into the economy in the process, generating the inflation cycle that we never recovered from. Federal Reserve Chair Kevin Warsh wants to pull that money back out of the economy now, but that will be a challenge. Other factors contributing to the current rise in inflation is the strong demand for credit for building data centers, which competes with the Treasury’s offer of debt certificates to fund the government. That has yields on U.S. Treasury yields roughly 300 basis points above what they are in China currently. Of course, another factor pushing yields higher is investor expectations of higher inflation ahead.

Crude oil prices hit a nearly four-week high this morning as tensions in the Middle East continue to escalate. President Trump seeks to isolate Iran financially as it continues to strike boats in the Strait of Hormuz – generally a pace of one or so a day; sometimes more. A big piece of that was the decision by the United Arab Emirates to cut all financial ties with Iran. President Trump threatened economic consequences for any nation doing business with Iran. To be sure, crude oil supplies are getting through the Strait of Hormuz. Some reports put that flow above 4 million barrels per day, but other sources say that it is well above that level, although nobody can say by how much. Even so, it falls short of the level needed to supply the world, and the markets are starting to realize that.

The Pro Farmer Midwest Crop Tour pegged the Illinois corn crop at nearly 15 bushels below last year. Soybean pod counts were just below year ago levels, but still comfortably above average. It assumes a normal seed size, although this year’s mild August temperatures will likely boost that seed size a bit, raising those yields. Nonetheless, they were disappointed in the Illinois crop, albeit a step up from the Indiana and Ohio numbers. The two legs of the tour will focus on more of Iowa and southern Minnesota today. The western leg of the tour focused on western Iowa yesterday. I was surprised to see that northwest Iowa performed the best, coming in 3.3% above the three-year average even though it has been plagued by drought most of the year. The bottom line though is that the market continues to fear that this year’s corn and soybean crops will fall short of our current strong demand base.   

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