December 4 – Stock futures pulled back overnight, as traders brace for a plethora of key economic data this week, culminating in the highly-anticipated monthly jobs report on Friday. All of this comes ahead of next week’s meeting of the Federal Open Market Committee, which will review the Federal Reserve’s monetary policy. The focus is again on tepid economic activity, which traders anticipate may result in a pivot by the Fed next year, but in the meantime, it creates concerns about demand for commodities, keeping pressure on that sector. The VIX Is trading near 13 again this morning, while the dollar index is trading near 103.5. Yields on 10-year Treasuries are trading near 4.27%, while yields on 2-year Treasuries are trading near 4.64%. That may be a concern for the Fed next week, as recent lower rates may stimulate economic activity before inflation drops to the 2% mandate. Crude oil prices are 1% lower on those demand concerns, while the grain and oilseed sector is mixed.
The Federal Reserve will continue to walk a fine line next week as it considers potential changes to its monetary policy. Official statements emerging from the meeting will likely focus on how the central bank’s policy is working to slow economic activity in an effort to bring inflation down to the 2% mandate, while stating that they need to stay the course to make sure that we do not see a resurgence of inflation, as happened in 1980 when the Fed pivoted too soon. Analysts will monitor individual member rate expectations, as shown in the dot plot graphic, for signs of pivot expectations going forward. The Fed knows that the effectiveness of its policy is as much about market and consumer expectations as it is actual policy. The recently released consumer sentiment survey showed that consumers currently expect a resurgence of inflation in the month’s ahead, which has to be a concern of Fed members. Expectations of inflation being a longer-term problem tends to result in labor actions to increase wages, further perpetuating the inflation cycle.
China’s Evergrande Group – its most indebted real estate company with liabilities of $327 billion – will be allowed to extend its restructuring plan following a favorable court ruling in China. This gives it eight more weeks to come up with a solution to its spiraling debt problem amid a stagnant property market. China’s central bank vowed to safeguard against systemic risks in a recent statement, including worries about mounting debt for local governments. The next focus will be China’s central economic work conference this month at which policymakers will discuss economic targets for the coming year. It’s a closed-door meeting, with the product of the meetings typically not announced until the following March. However, one has to wonder whether officials will release something earlier this year to reassure consumers that the economy will be fine. Weak consumer confidence is one of the primary factors undermining the property market currently.
Soybean prices broke below areas of chart support to double-digit losses overnight following good rains in key crop areas of both Argentina and Brazil over the weekend. A quarter of the grain belt missed out on the rains in Argentina, but widespread relief is expected in the 6- to 15-day period. Roughly a third of Brazil’s soybean belt remains under stress, focused primarily on areas of Center-West and on northeast Brazil. Showers will remain widely scattered in these areas for much of this week, with heat expanding Wednesday to Friday, before we see increased relief in the 11- to 15-day period. The 16- to 30-day period continues to show an improving pattern as well, although confidence is weak at this point, considering the poor performance of showers moving forward in the models thus far this growing season. That said, soybean traders are disheartened by a series of local private estimates calling for record to near-record production this year, despite the adverse weather pattern. That includes StoneX Brazil’s customer survey released on Friday that pegged the crop at a record 161.9 million metric tons, down from 165.0 mmt the previous month.
Wheat prices continued to find support from short-covering and end user buying on signs of a possible bottom on the charts, while corn and soybean prices were under pressure overnight from fears that USDA will reinforce the concept of ample supplies when it updates its monthly WASDE crop report on Friday. That end user buying in wheat includes China, which purchased another 16.2 million bushels of U.S. soft red winter wheat overnight, on top of its other recent U.S. wheat purchases. None of this recent export demand turns the supply and demand tables bullish, but when combined with stabilizing Black Sea prices, makes fund managers holding big short positions consider the possibility that we may have carved out a bottom in the market, at least for now.
