August 31 – Consumer spending surged last month, while jobless claims dropped. Stock futures firmed this morning, although they remain cautious ahead of tomorrow’s monthly jobs report. The VIX fell to a one-month low below 14 this morning, while the dollar index firmed to 103.6. Yields on 10-year Treasuries are trading near 4.10%, while yields on 2-year Treasuries are trading near 4.89%. Crude oil prices are 1.5% higher to two-week highs on market chatter that OPEC+ will extend production cuts through October, while the grain and oilseed complex was mixed to weaker.
Personal income rose 0.2% month-on-month in July, down from analyst expectations that it would repeat June’s growth of 0.3%. However, personal expenditures rose 0.8% month-on-month in July, up from 0.5% in June and up from analyst expectations of 0.6% growth. Consumers are still spending, using credit cards if necessary to do so. The headline PCE price index rose 0.2% month-on-month in July, which was steady with the previous month and with analyst expectations. The PCE price index was up 3.3% year-on-year in July, up from 3.0% the previous month, but matching analyst expectations. The core PCE price index that excludes the more volatile food and energy sectors rose 0.2% month-on-month, matching the previous month and matching analyst expectations. The core PCE price index was up 4.2% year-on-year in July, up from 4.1% in June, but matching analyst expectations. All of this was consistent with the consumer price index report. The key question will be what happens in the August numbers, considering the rise in energy prices that the July data did not capture.
First-time claims for unemployment benefits fell to a low 228K in the week ending August 26, down from 232K the previous week, and below analyst expectations of 238K claims. That puts the four-week moving average at 237.5K claims, which essentially matches the previous week. Continuing claims for the week ending August 19 rose 28K to 1.725 million, while the four-week moving average rose 8,250 to 1.704 million. Today’s Challenger job-cut report revealed announcements for 75,151 layoffs in the coming weeks, up from 23,697 announced last month.
China’s property market is a key indicator for the health of its economy – accounting for 30% of gross domestic product. Three-fourths of the typical citizen’s assets are tied up in real estate. That makes it a big part in shaping consumer sentiment, and consumer spending. Josh Cannington, StoneX Vice President of Interest Rate Management notes that China’s property developers face an 18.9 trillion-yuan liquidity shortfall that could morph into a solvency crunch by the end of this year. That’s equal to 15% of China’s GDP. This year’s slump in real estate sales risks cutting off sources of funding for developers to meet a wall of financial obligations coming due later this year. Their estimated short-term liabilities and investment commitments are expected to exceed cash on hand by 18.9 trillion yuan by December, at the current pace. Bank loans could provide perhaps 4.2 trillion yuan, but that would still leave a deficit of 14.7 trillion yuan. The government will likely come to the rescue, but that could strain its balance sheet as well. The 18.9 trillion yuan needed would be equal to two-thirds of the general budget of the central and local governments combined. Paying that bill would necessitate a massive issuance of debt certificates, or severe cutbacks in other expenses, or some combination of that and developers taking an equity hit. Real estate firm Country Garden reported a 48.9-billion-yuan ($6.7 billion) loss in the first half of 2023.
This morning’s weekly USDA export sales report revealed little in market-moving news, although grain sorghum sales remain strong to China. Outside of that, China continues to be an active buyer of Brazilian soybeans, and to a lessor extent corn. Yes, China is buying soybeans from the United States, but nowhere close to the pace that it normally does this time of year. Brazilian soybeans remain very competitive for this time of year, while Chinese buyers also remain concerned about problems getting soybeans through the Panama Canal in the months ahead as low water levels continue to plague the canal. Chinese buyers will be monitoring the start of Brazil’s growing season closely. El Nino weather patterns tend to favor Argentina and southern Brazil, while the start of the growing season can often be delayed in Mato Grosso and other northern areas by a delay of the start of the monsoon rains in El Nino years. These northern areas typically do not allow soybeans to be planted until after September 15 to reduce risk from Asian rust, Mato Grosso farmers have been granted permission to plant as early as September 1 this year, but very few farmers are currently expected to do so due to the above rust and rainfall concerns.
The Midwest is heating up again, while it also remains mostly dry. This is taking a toll on crops, with yield projections slowly eroding lower. Some would argue rapidly eroding lower, and that’s true in some areas. But we lack data to suggest that the national corn and soybean crop yields are collapsing at this point. USDA is currently sampling fields across the Midwest, which should give us our best look to date at the crops when they release their results on September 12.
