July 22 – Computer applications are generally working following Friday’s debacle, while a sitting president pulls out of the race for re-election. Those are the primary factors shaping sentiment on Wall Street this morning, although traders also have their eyes on second quarter GDP and PCE inflation data scheduled for release later this week. But the mood is upbeat for now, with stock futures pointing upward. The VIX pulled back from Friday’s nearly three-month highs above 17 to trade near 16 this morning, while the dollar index traded near 104.3. Yields on 10-year Treasuries traded near 4.22%, while yields on 2-year Treasuries traded near 4.52%. Crude oil prices are at fresh five-week lows below $80 per barrel this morning on ideas that supplies may be in a surplus next year, while the grain and oilseed markets were mostly higher overnight.
The Chicago Fed national activity index is a monthly index of the nation’s economic activity constructed from 85 existing indicators to equal zero when the economy is growing at a trend rate, with a standard deviation of one. The index for June was 0.05, indicating that the economy grew at slightly above trend rates during the month. However, that was down from an upwardly revised 0.23 in May, and below analyst expectations of 0.10. This does confirm that the growth rate is slowing, but it also suggests that there is still too much organic strength to cut rates.
President Joe Biden withdrew from the presidential campaign on Sunday, ending months of speculation that escalated following a poor debate performance last month. He endorsed current Vice-President Kamala Harris as his replacement, which would make for an easier transfer of the campaign funds that he has accumulated. The problem is, some major Democratic leaders, including former President Barack Obama, have thus far withheld their endorsements, while other candidates appear interested. Former President Trump has pivoted his campaign toward expectations of running against Harris, but he may not really know who his opponent is until after the Democratic National Convention in a month. Meanwhile, the Democrats will surely garner the media attention in the weeks ahead, even amid the Olympics, stealing much of the momentum away from Trump that he garnered in last week’s Republican National Convention. As such, the markets still need to assume that this will be a close race that will likely be challenged by whoever loses, leaving many policy issues up in the air over the next six months. It will also be assumed that Harris will take a more active role in decisions impacting the country from a policy standpoint over the coming weeks and months, which will leave many on Wall Street trying to figure out her positions. That will also be the case for many foreign leaders – from Zelensky to Netanyahu to Xi.
The Chinese yuan continued to lose ground versus the dollar today, while Chinese stocks were generally weaker as well, after the People’s Bank of China surprised everyone by cutting 10 basis points from the central bank’s benchmark one-year and five-year lending rates, dropping them to 3.35% and 3.85% respectively. China has largely resisted these stimulative moves over the past year to keep the yuan from losing value relative to the U.S. dollar. A PBOC official stated in January that China would have more freedom to stimulate its economy in 2024 as the U.S. Federal Reserve cuts rates. But those rate cuts have not yet come, and there is still some doubt whether they will come, leaving the PBOC in an uncomfortable position of needing to go ahead with its own rate cuts. China has been in it for the long game of replacing the dollar as the dominant global currency. It believes that is the key to knocking the United States off of its position of being the world’s dominant economy and military, which it believes are closely intertwined. It recognizes that such a shift will take time, but China thinks of policy in terms of decades and centuries, while we in the West think of it in terms of four-year election cycles. The Chinese yuan accounted for 4.47% of global payments at the end of May, according to the SWIFT banking system, marketing its third consecutive month of declines, while still up from 2.54% one year prior. Yet, that was enough for it to take third place in global trade, behind the dollar and the euro, but ahead of the yen. Meanwhile, the U.S. dollar accounted for 47.89% of global trade, with the euro at 22.8%.
The next two weeks are not highly threatening for Midwest corn and soybeans, but they’re not as ideal as they looked last week either. Temperatures will lean more normal to above normal over the next two weeks, while rains look to be leaning toward below normal for most areas. No “dome of doom” is seen for the Midwest at this point, but we will likely start seeing crop ratings decline somewhat as we head into August. That’s normal for this time of year, but traders will be watching to see if they fall a bit faster than normal. Commodity Weather Group pegged the U.S. corn crop at 182.2 bushels per acre on Friday, just above USDA’s trend yield of 181.0 bpa. CWG considered crop ratings, satellite-derived vegetative health data and weather data and forecasts in developing its estimates. As for the NDVI satellite data, most states are above average, while still below year ago levels.
