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By: Arlan Suderman, Chief Commodities Economist
July 16 – Stock futures traded mixed to firmer overnight in generally quiet trade. Both the Middle East and the Black Sea Region – both of which are key energy / food producing regions – are on fire so to speak, but both the S&P and Dow stock indices are trading near record highs, while the VIX trades near 16. The dollar index is trading near 100.6 as it slips to a nearly four-week low. Yields on 10-year Treasuries are trading near 4.59%, while yields on 2-year Treasuries are trading near 4.17% as the yield curve shows signs of steepening again. WTI crude oil consolidated near $80 per barrel overnight, while Brent trades near $86 per barrel. The grain and oilseed sector was again mostly higher overnight, as it trades increased risks in the Black Sea combined with improving demand prospects. However, weak export sales data just ahead of the morning pause weighed on futures.
Retail sales rose 0.2% on the month in June, slowing notably from an upwardly revised 1.0% monthly growth rate in May, and a bit below the 0.3% growth expected by analysts. Retail sales minus vehicles fell by 0.2% on the month in June, down from an upwardly revised 1.0% growth pace in May, and worse than the 0.1% contraction expected by analysts. But removing both vehicles and falling gasoline prices resulted in retail sales that rose a more solid 0.4% on the month in June, down from an upwardly revised 0.8% growth pace in May, but above the 0.3% growth pace expected by analysts.
First time claims for jobless benefits fell to 208K in the week ending July 11, down from 216K the previous week, and down from analyst expectations of 220K claims. That dropped the four-week moving average to a low 214.25K claims, down from 219K the previous week. Continuing claims for the week ending July 4 dropped by 16K to 1.805 million. The four-week moving average firmed by 1,250 to 1.811 million. Continuing claims remain modestly elevated, but not necessarily problematic, while weekly claims numbers remain at historically low levels.
Commodity transportation remains the key target in both the Strait of Hormuz and the Black Sea – spanning two different wars. These two conflicts continue to challenge the world’s just-in-time mentality for obtaining vital energy and food-based commodities. The United States continues to hit targets in Iran, while also securing a blockade along Iran’s entire coastline. That included a strike on a supertanker that ignored warnings to move toward docking at Iran’s Kharg Island, through which 90% of its oil exports flow. The United States has inflicted significant damage to Iran’s strategic military operations, but it has not yet inflicted enough damage to keep Iran from striking vessels trying to move through the Strait of Hormuz. Yet, the U.S. military stated this morning that it assisted 10 vessels in their move through the Strait overnight. That’s just a small fraction of what moved through the Strait each day prior to the war, but it is certainly more than what was passing through the Strait a couple of months ago. The United States hopes that its continual strikes on Iran will eventually sufficiently reduce Iran’s strike capability to the point where ships will feel safe passing through the Strait, but there’s little way of knowing at this point how long that will take. Meanwhile, Iran is asking the Houthis in Yemen to prepare to start striking ships through the strait at Bab-el-Mandeb at the south end of the Red Sea. That would effectively shut off Saudi oil exports to Asia, while causing tankers and freighters to again take the long route around Africa. Houthi capability to strike ships exiting the Red Sea is believed to be dramatically less than it was a couple of years ago, but it may still be enough to create sufficient fear to effectively shut down traffic. That will be a risk to monitor.
Ukraine upped the ante on Wednesday when it began striking ships in the Black Sea near Novorossijsk. It continued to focus on ships carrying oil, but the risks are growing that it could also start striking ships carrying wheat from this vital port. Ukrainian strikes in the Sea of Azov effectively cut off Russian wheat and energy exports through that channel, shifting much of that business to the Black Sea, with Novorossijsk being the most significant Russian export terminal on the Black Sea. Russia has already essentially shut down water-borne Ukrainian grain exports. Two of the three major Ukraine ports are still operational, but the major shipping companies are essentially afraid to use them, fearing that their ships will be targeted by Russia. Ukraine will likely try to shift toward more expensive land routes to move grain to other terminals like it did when the war first broke out, but that has its own set of challenges. Both countries seem intent on stopping the other’s ability to export commodities, and that raises risks to global trade. Each day seemingly brings more escalation in this war on commodities in the Black Sea Region. Wheat is most at risk, but Ukraine is also the world’s fourth largest corn exporter, along with being a significant exporter of edible oils. This is what was feared in 2022 when Russia first invaded Ukraine, but now that fear is slowly becoming reality. Neither side shows signs of backing down at this point, and the world community still seems largely focused on the Middle East conflict.
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July 16 – Stock futures traded mixed to firmer overnight in generally quiet trade. Both the Middle East and the Black Sea Region – both of which are key energy / food producing regions – are on fire so to speak, but both the S&P and Dow stock indices are trading near record highs, while the VIX trades near 16. The dollar index is trading near 100.6 as it slips to a nearly four-week low. Yields on 10-year Treasuries are trading near 4.59%, while yields on 2-year Treasuries are trading near 4.17% as the yield curve shows signs of steepening again. WTI crude oil consolidated near $80 per barrel overnight, while Brent trades near $86 per barrel. The grain and oilseed sector was again mostly higher overnight, as it trades increased risks in the Black Sea combined with improving demand prospects. However, weak export sales data just ahead of the morning pause weighed on futures.
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