August 7 – The recovery continues on Wall Street this morning, as an influential Bank of Japan deputy governor reassures global traders that the central bank will not hike interest rates further when the markets are unstable. Stocks are rallying to start the day, with the VIX dipping below 23 this morning. The dollar index continues to rebound with Treasury yields, as it trades near 103.2 at this hour. Yields on 10-year Treasuries are trading near 3.94%, which is well off of Monday’s low near 3.67%, while yields on 2-year Treasuries are trading near 4.01%. Crude oil prices are nearly 2% higher as easing economic fears allow traders to again focus on escalating Middle East risks. The grain and oilseed markets are mixed, with wheat prices again trying to rebound, while corn and soybean prices again come under pressure from big crop expectations and increased farmer selling as they clean out their storage bins to make room for the big harvest ahead.
Shinichi Uchida calmed fears today that we would see another rate hike coming from the Bank of Japan anytime soon. His comments were a sharp contrast from the hawkish comments made by BOJ Governor Kazuo Ueda a week ago when the central bank unexpected raised rates by the most in 15 years, ending eight years of negative rates for Japan. That triggered a massive yen carry trade unwind that started to pull money back home to Japan at the expense of U.S. equity and Treasury markets. That selloff triggered economic fears, resulting in panic selling around the world. I commented yesterday that we’re still early in the yen carry trade unwind phase, leaving more potential volatility ahead. However, it is hoped that these comments will calm the waters, so to speak, allowing for a more orderly unwind going forward that would calm the panic emotions that we’ve seen in the financial markets over much of the past week.
The yen carry trade unwind is expected to reduce Japanese investment in the U.S. Treasury and equity markets going forward, reducing demand for U.S. debt certificates at a time when the supply of those certificates is notably higher due to escalated fiscal spending. That has been masked in recent days by the panic-driven flight to safety of other investors who rushed to the Treasury market as the stock market broke sharply lower. But note how Treasury yields have been rebounding since that rush to safety has eased. The primary question now is whether we’ve done notable damage to consumer sentiment with the recent stock market selloff, or can it be quickly restored. Quickly restoring it could result in consumers rapidly taking advantage of these lower interest rates to refinance mortgages, buy a new house, or borrow money to make other consumer purchases, stimulating the economy. We might also see corporations seize these lower yield opportunities to expand operations. Contrarily, a damaged consumer sentiment that results in continued fear would be expected to reduce consumer buying in the weeks ahead as they worry about the future, resulting in additional layoffs by retailers and factories, adding to recessionary worries. We’re not out of the woods yet, but it would go a long way toward restoring consumer confidence if we can finish this week strong on the stock market. Longer-term though, I still stand by my expectation that we’re going to see upward pressure on mid- and long-term Treasury yields due to our country’s fiscal spending problem, including risks of a credit rating downgrade at the end of this year if Congress fails to properly handle the debt ceiling issue.
A plan to build a new power system in China was released jointly by three government entities today. The plan focuses on integrating China’s demand for computing power and green energy resources in the years ahead to connect data centers across the country. The idea is to scientifically lay out computing power with a supportive reliable electricity infrastructure. The plan also focuses on recycling waste heat resources from the data centers to help meet the needs of a high-demand AI technology development process. Artificial Intelligence work dramatically increases power needs, but China wants to be seen as a world leader in AI. China’s move toward green energy leadership dramatically increases its need for key industrial metals, such as copper, aluminum, and rare earth minerals. China’s copper imports rose 9% year-on-year in July, with year-to-date imports up 6.5%.
The big wave of corn and soybean selling is occurring as farmers clean out their bins to make room for the approaching harvest, which currently appears to be a big one. It’s mostly about corn selling here in the States, as most farmers had already moved their soybeans, but Brazilian farmers are also looking at a break in its currency as incentive to move soybeans. The Brazilian farmer still possesses roughly a fifth of last year’s crop, while he’s also beginning to sell the next crop that he’ll start planting next month. Farmers indicated in our StoneX Brazil survey that they will produce a 165 million metric ton soybean crop in the coming growing season, up more than 10% from the previous year’s crop. La Nina sometimes results in a short crop, especially in southern areas, but there have also been years when La Nina produced a record crop. As such, we need to plan on trend yields for now.
