February 25 – Stock futures traded both sides of unchanged overnight, while firming early this morning, even as Treasury yields fell sharply. The VIX largely traded between 19 and 20 overnight as investor nerves about the economy ratchet higher, while the dollar index slipped lower to trade near 106.4. Yields on 10-year Treasuries are trading at fresh 10-week lows near 4.31% as investors move to the relative safety of government securities, while yields on 2-year Treasuries are trading near 4.11%. Crude oil prices are modestly lower to the $70 per barrel area on demand uncertainties. The grain and oilseed complex is mostly lower as well.
President Trump loves the microphone. And he can’t resist talking about tariffs when there’s a microphone in front of him. The constant comments and surprises are wearing on investor confidence that was high following his election in November, while wearing on consumer confidence as well. Neither investors nor consumers like uncertainty, and they have plenty of it currently. Trump is again talking about tariffs on Canada and Mexico as the 30 day pause approaches its conclusion, while he is also ramping up pressure on China. His advisory team continues to work on its recommendations for tariffs on countries around the world, to be presented to Trump on April 1st. The people voted for a disruptor, and that is what they got. Both investors and consumers are trying to figure out if that is net good or net bad for the economy, but neither can figure that out until they have a better handle on the details. And those details look to be some weeks away yet.
President Trump stated Monday that 25% tariffs on Canada and Mexico that are currently on a 30-day pause will go into effect when that pause expires next week. The tariffs initially had the stated purpose of getting Canada and Mexico’s support for helping to seal the border to stop the flow of illegal migration and drugs into the United States. Both countries made significant investments to make that happen. Yet, Trump’s comments on Monday tied the tariffs to the trade deficit with those two countries. U.S. Census Bureau data suggests that the trade imbalance with Mexico totaled $172 billion in 2024, while it was $64 billion with Canada. The tariffs first imposed on February 1st were 25% on products flowing from Canada and Mexico, although Canadian energy products were to be taxed at 10%. Implementation of the above tariffs next week would essentially scrap the free trade agreement that we have with our neighbors, which may be Trump’s objective in hopes of getting what he would see as a “better” deal. The February 1st actions also included a 10% tariff on all goods coming from China, which remains in place. Wall Street fears an escalation of retaliatory tariffs that would inflate prices while stalling economic growth.
China’s main annual policy event is its “Two Sessions” conference of party leaders meets next week. This is the event used by communist leaders each year to unveil their annual economic growth targets, which they will make sure that the numbers show that they met, and to announce major government budget allocations for the current calendar year. The expectation is that we will see more confirmation of stimulus associated with those goals. Both Beijing and Guangzhou city, which make up the nation’s trade hub, ramped up the issuance of special bonds for land reserve purchases. This is a program that supports government purchases of surplus land and unsold projects from developers with the purpose of easing the surplus supply and therefore to support property values. Housing sales enjoyed four months of relative strength following stimulus packages announced last fall, but they have begun to slip once again. This government reserve of property reminds me of how the U.S. government bought up surplus grain supplies in the 1980s to support prices. The problem was that the market never could sustain a rally, because it always knew those reserve supplies were still there that the government could release if prices rallied. The net result was sustained price weakness over an extended period of time until the reserves were gone.
Fresh headwinds were blowing once again for the commodity sector overnight as traders worry about a global economic slowdown tied to trade disruptions and tariffs. But there are fundamental factors at play as well. Dry areas of Argentina are now worrying about flooding from excessive rains. Wet areas of Brazil that slowed soybean harvest and corn planting have dried out, although producers there are starting to worry about the dry leaning of the forecast going forward. The extreme cold that threatened winter wheat in both Russia and the United States has passed. All of this takes place following an extended period of managed money buying, and those buyers are now growing nervous as near-term chart signals turn lower. Corn prices set the tone last fall that supported the upward trend of grain and oilseed prices, and corn prices are setting the tone now to downside. Momentum trading Algos add to the losses as those momentum signals turn lower. Traders will look to USDA’s Outlook Forum on Thursday and Friday for fresh fundamental news, including indications of what the agency expects in the way of crop yields and planted acreage for the coming growing season.
