February 20 – Stock futures pointed lower overnight, as traders worry that the Federal Reserve will delay the highly-anticipated interest rate cuts after a couple of hotter-than-expected inflation reports last week. The announcement of new stimulus measures in China helped its markets, but it did little to push U.S. stocks into positive territory. The VIX is trading near 15 this morning, while the dollar index is trading near 103.9. Yields on 10-year Treasuries pulled back to trade near 4.27% after failing to test the 100-day moving average on the charts, while yields on 2-year Treasuries are trading near 4.59%. Crude oil prices are quietly mixed, even as they probe to fresh 14-week highs. Rising geopolitical risks provide support for crude oil prices, while softening demand estimates limit gains thus far this morning. The grain and oilseed sector traded mostly higher overnight on speculative short covering after a grain ship was severely damaged in an attack by Houthi Rebels in the Red Sea.
China’s central bank cut its benchmark lending rate for home mortgages today. The five-year LPR was cut by 25 basis points to 3.95% today, which was a larger cut than the 15 basis points anticipated by analysts. The cut is an attempt to jumpstart China’s ailing housing market. However, the one-year LPR utilized primarily by businesses was left unchanged at 3.45%, versus an anticipated 10 basis point cut. The central bank appeared to be seeking to stimulate the housing market without unnecessarily putting downward pressure on the yuan at a time when the Federal Reserve is delaying rate cuts. China wants the world to see the yuan as a strong alternative to the dollar, but too much stimulus could weaken it, making it less desirable. A central bank official stated last month that China should have more leeway for stimulus this year with the Federal Reserve expected to cut U.S. rates, but now that is in question following last week’s U.S. inflation data.
Holiday spending boomed in China during its recent eight-day Lunar New Year celebrations. Headlines within China spoke of packed roads, airports, restaurants, movie theatres, and tourist attractions. Government officials estimate that 474 million domestic trips were taken within China during the holiday period, which was up 34% from the previous year, and up 20% from 2019 – before the Covid pandemic. Travel spending was up 47% from 2023 levels, and up 7.7% from 2019. The data shows that overseas tourists coming to China are back to 90% of pre-pandemic levels. China still has lingering economic problems driven by reduced exports to Europe and to the United States, as well as to a sluggish domestic property market. Yet, consumers appear anxious to spend money on short-term pleasure activities, as illustrated by the holiday spending.
Iran-backed Houthi’s based in Yemen claimed credit for an attack on the Rubymar cargo ship in the Gulf of Aden in the Red Sea over the weekend. The ship is the first grain cargo ship hit in the region, with expectations that its corn cargo will be lost if it sinks, which now looks likely. Ironically, there are unconfirmed reports that the ship was loaded with Ukrainian corn headed to Iran. Two missiles were fired at the ship, with one reportedly hitting the engine room. The crew has abandoned the ship while the UK Navy provides assistance. The attack on a grain carrying ship – and one not directly tied to either Israel or the United States – represents an escalation of the risks for freight moving through the region. It does not reduce the supply of commodities produced in the world – at least not at this point – but it does increase freight costs while lengthening delivery times as shippers choose longer routes. That in turn reduces the supply of available ships. Air freight is also rising for consumer goods as shippers seek alternative methods of delivery. All of the above then contributes longer-term to inflationary pressures on the global economy.
Nothing changed fundamentally for the grain and oilseed markets over the weekend, other than the nerves of fund managers holding large short positions in the grain and oilseed sector. The biggest fear of someone holding large short positions is a headline that might cause others holding similar positions to unwind those positions. The same fear is held by end users lacking coverage. As such, the attack on a grain carrying ship in the Middle East led to short covering overnight. It’s yet to be seen how far this short covering rally will carry prices. Farmers are undersold in both Brazil and in the United States, so that is expected to limit the upside potential for now. Chinese commitments indicate that 9.3 million metric tons of soybeans are expected to be shipped to the world’s largest importer this month, with 6 mmt of that total originating in Brazil. Soybean export shipments from Brazil to China are expected to be in the 11 to 12 mmt per month range in March and April. Meanwhile, forecast maps are raising more concerns for the winter corn crop in March and April, with below normal rainfall expected in Center-West Brazil.
