August 30 – Stocks were quietly mixed overnight ahead of this morning’s data dump. That data tended to support modest strength in stock futures, while leading the dollar to drop along with Treasury yields. The VIX is trading near 14, while the dollar index is trading lower near 103.1. Yields on 10-year Treasuries are trading near 4.10%, while yields on 2-year Treasuries are trading near 4.84%. Crude oil prices are modestly higher, while the grain and oilseed sector is mostly higher as well.
Today’s ADP employment report indicated that the private sector created 177K jobs in August, down from 371K in July and below analyst expectations of 200K. The correlation between the ADP report and the government’s monthly jobs report due out on Friday isn’t always the best, but this morning’s numbers provided more fodder to the doves seeking a pivot by the Federal Reserve. In other words, they see the Fed’s monetary policy working to loosen the jobs market to ease wage inflation given time necessary to work.
The second read on gross domestic product revealed that the economy grew at an annualized rate of 2.1% in the second quarter, which came in below the first reading of 2.4%. Analysts expected that GDP would hold at that 2.4% level. Personal expenditures grew at an annualized rate of 1.7% in the second quarter, up from 1.6% in the first reading, but matching analyst expectations. Here again, Wall Street traders see this as further evidence that the economy is not as resilient as the Fed thought last week when Fed Chair Jerome Powell gave his hawkish speech at the Jackson Hole Economic Symposium. As a result, we saw Treasury yields fall on the above reports, with the dollar following them lower on expectations that the Fed can pivot faster than believed following Powell’s speech on Friday. However, market moves were also restrained by the fact that tomorrow’s inflation data and Friday’s monthly jobs report are still the two biggest reports of the week.
Stocks pulled back in China today as traders took profits on recent gains amid re-emerging concerns about the economy, with foreign investment seen at a net outflow for the session. China’s economy has a lot of problems, but it would be premature to suggest that its economy is going to crash. China still has many tools available to sustain its economy. Yet, authorities must balance use of those tools with the negative effects such could have on the yuan. China wants the world to see the yuan as a strong alternative to the U.S. dollar as the world’s currency of trade, particularly as it supports expansion of the BRICS coalition of nations. Leaders in China don’t need to worry about re-election as do leaders in the United States, where they are quicker to support stimulus spending that may have adverse longer-term consequences. As such, Chinese leaders are likely being patient to implement many of these procedures that could weaken the yuan, hoping that the economy will work itself out of its problems. That’s doubtful at this point, but authorities have been patiently hoping that to be the case. That said, we have seen China’s Central Bank issue guidance this month for a possible reduction in home mortgages. That spurred rumors that a rate cut on mortgages is coming soon that would essentially increase homeowner discretionary spending to support the economy. Such a cut would also likely be accompanied by a cut in savings rates to support bank balance sheets while also encouraging more consumer spending versus saving. Nonetheless, I continue to anticipate that China will remain patient and methodical in its stimulus efforts.
Crude oil prices found support from modest platform shutdowns in the Gulf of Mexico due to Hurricane Idalia, along with the continued shrinkage of U.S. inventories. Today’s weekly inventory report is expected to show another 11.5-million-barrel draw, on top of the 23.5-million-barrel draw already seen this month in commercial stocks. Grain and oilseed prices were also firmer overnight, as prices bounced following recent losses. I continue to hear anecdotal reports of rapid deterioration of crops over the past week. It’s most noticeable for corn, but soybeans are also impacted in how pods fill. The trick is translating anecdotal reports into data. We know that there are areas of the Midwest where last week’s extreme heat exposed problems hidden beneath the surface from previous stress periods during the growing season. The amount of loss varies greatly by soil type and hybrid planted. Again, the problems don’t show up from the road so much as they do when you walk deeper into the field. It’s difficult to quantify the impact this will have on the national yield at this point, but it should show up in USDA’s field sampling if it is a widespread problem. I believe that the market is currently pricing in a corn yield of 172 – 174 bushels per acre, with soybeans of 50 – 50.5 bpa. Regardless, I do see yields trending lower, but the scope of those losses is yet to be determined. USDA will likely offset yield losses with cuts in demand, especially for corn. The pivotal question will be whether yield losses will be enough to overcome demand problems? Another key to watch will be the interaction between energy prices and the grain and oilseed complex as impacted by the economy in the weeks and months ahead.
