August 22 – Stock futures pointed higher early this morning as earnings report optimism overshadowed a credit rating downgrade for multiple U.S. regional banks by S&P Global. That’s a sharp contrast to the market’s reaction to similar downgrades by Moody’s earlier this month. The VIX is trading below 17 at this hour, while the dollar index is trading near103.4. Yields on 10-year Treasuries are trading near 4.34% after hitting a fresh 15-year high near 4.37% overnight, while yields on 2-year Treasuries are trading near 5.02%. Crude oil prices are modestly lower, while the grain and oilseed complex is mixed to higher this morning.
S&P Global cited higher funding costs and problems in the commercial real estate market as challenges that led it to downgrade credit ratings for multiple regional banks late Monday. Reuters reports that S&P Global cut its rating for UMB Financial Corp, Comerica Bank, and KeyCorp on large deposit outflows and prevailing higher interest rates, while citing funding risks and a higher reliance on brokered deposits as reasons for downgrading Associated Banc-Corp and Valley National Bancorp. S&P Global also cut its outlook to “negative” from “stable” for S&T Bank and River City Bank due to higher commercial real estate exposure. The downgrades increase borrowing costs for the banks, which are already on the rise. This week’s rise in 10-year Treasuries to fresh 15-year highs further raises risks for the commercial real estate sector and the banks who finance that sector, as well as other banks who simply do not have protection in place to guard against rising rates. Moody’s cut its credit rating for 10 regional banks earlier this month, while Fitch stated last week that it could reduce ratings if the sector’s “operating environment” were to deteriorate further.
The recent bank downgrades provide a reminder that risks remain for the U.S. economy as the Federal Reserve contemplates its next move when it meets in four weeks. The market is currently trading roughly 45% odds of another rate hike this year, reflecting a gradual shift in sentiment on Wall Street in that direction. I see that as consistent with what the Fed has previously stated on numerous occasions. We’ll get another chance to hear from Fed Chair Jerome Powell on Friday when he addresses participants at the annual Jackson Hole, Wyoming symposium, and I anticipate that he will continue to beat the drum that the Fed will remain data driven, but that we should be prepared for rates that are “higher for longer.” We have not yet seen the changes in the data points that the Fed has frequently stated are its focus, and the Fed has clearly communicated on many occasions that it would rather error on the side of too high for too long than to pivot too soon as it did in 1980, which cost the American economy dearly.
Large portions of northeast China remain wet, following a period of extreme rains that fell on corn and soybean crops in the region. However, the local cash market is currently factoring in overall crop losses of less than what we’ve seen the past several years, with the forecasts generally favorable to finish the growing season. Chinese buyers were again active buyers of Brazilian soybeans last week, purchasing roughly 35 cargoes during the period. Nearly 20 of those cargoes were for September and October shipment, removing their need to buy from the United States during this traditionally active shipping period. Brazil has so many soybeans following its recent bumper harvest that it continues to have cheaper supplies available due to currency exchange rate advantages. Chinese buyers are also concerned about the added costs of pulling U.S. soybeans through the Panama Canal, where drought has slowed ship movement through its locks, creating a 20-day wait currently. China currently has 8 million metric tons of soybeans purchased for October shipment, of which 2.8 mmt (103 million bushels) are of Brazilian origin. That directly reduces U.S. shipments during our traditional peak shipping time.
Day #1 of the Pro Farmer Midwest Crop Tour found generally good corn and soybean crops in both Ohio and in South Dakota. That’s not really a surprise. I will be more interested in what they find as they get deeper into Nebraska today, and into Iowa and Illinois tomorrow. The day #1 results still fit with our yield projections, but observations the next couple of days will tell us a great deal more. My bias is that they will find more problems than expected the next couple of days, mixed in with some excellent results as well. I hope I’m wrong on the scope of the problem areas, but we’ll see. Unfortunately, the demand outlook for corn is so poor (not yet reflected by USDA) that we could take quite a yield hit and still have ample supplies, but the same can’t yet be said for soybeans because we do not yet know whether China will use its newly increased reserves to reduce U.S. purchases going forward.
