July 31 – Stock futures pushed modestly higher ahead of the final trading day of July, riding the optimism of a potential soft landing for the economy amid favorable earnings reports. The VIX continues to trade below 14 on the optimism. The dollar index is trading firmer to 101.7 this morning. Yields on 10-year Treasuries are trading near 3.98%, while yields on 2-year Treasuries are trading near 4.90%. Crude oil prices firmed to post fresh 15-week highs this morning, while the grain and oilseed complex came under active selling pressure as Midwest weather improves for crops, and amid an absence of fresh threats from the Ukraine war.
The Bank of Japan signaled an end of an era at the end of last week as it took incremental steps to move away from its policy of yield curve control in what many believe is its first steps toward ending decades of quantitative easing. Former Federal Reserve Chairman Ben Bernanke saw the BOJ’s monetary policy experiment as a model to follow more than 15 years ago when the United States and much of the rest of the world slipped into a financial crisis. Most other major central banks followed, with the rise of academics calling for a new direction in monetary policy – Modern Monetary Theory. The end result – to a great extent – is the current global inflation problem. Unwinding the mess created is the challenge remaining before us.
The BOJ’s big experiment failed to bring about the promised economic growth, and now leaders are trying to unwind it. The implications are massive. Japanese investors are the largest holders of U.S. government debt at $1.13 trillion, due to its higher return than the previously negative returns on Japanese securities. China comes in second at $0.87 trillion. The fear is that Japanese investors will rotate out of U.S. Treasuries as Japanese rates start to recover, resulting in the need for U.S. yields to rise to find replacement buyers as our debt continues to rise. Finding new buyers of U.S. Treasuries becomes more difficult as the Fed reduces its buying of U.S. debt certificates to the tune of $1.14 trillion per year. Wall Street has been focused on when the Fed may pivot on its interest rate policy, but that doesn’t necessarily mean that longer-term rates will be going down due to the above.
China’s economic data continues to reflect problems, with factory activity in contraction for the fourth consecutive month in July. The non-manufacturing sector continues to see modest growth, but the numbers are in decline there as well. Shrinking exports as much of the West decouples from China is one of the primary causes of the economic malaise that has consumers worried about the future, resulting in less domestic spending as well. Analysts continue to expect more stimulus, but China’s economic toolbox has very limited options at this point.
China’s National Meteorological Center warned of a higher risk of crop damage in its corn belt amid continuing hot and wet conditions across much of the region as post-typhoon thunderstorms persist. Parts of China’s northern provinces were hit by the heaviest rainfall in more than a decade over the weekend. Tropical Storm Khanan has formed in the Pacific, and it too is on track to bring heavy rains to China’s coast as early as Tuesday. Lodging and disease problems are the greatest concern. Commodity Weather Group stated late last week that other similar years saw above-trend yields in China, so we can’t assume that the current pattern will result in significant crop losses, but a similar pattern in 2015 did result in significant losses following a rust outbreak in corn, so the risk remains.
Nearly 2,000 severe weather reports came in over the past three days in what turned out to be a more active weather pattern over the U.S. Midwest than expected. Widespread power outages from Iowa to our nation’s capital were reported due to high winds, but crop damage reports thus far have been rather limited. The long-awaited transition is happening, with last week’s heat now in our rear-view mirror, and a more active pattern promising to bring more rains to thirsty Midwest crops. It will be a messy pattern, with some people still missing storms. But overall, we should see a much milder pattern over the next two weeks, with steadily improving rainfall chances to benefit grain-filling corn and pod-setting soybeans. Some damage was done over the past week to 10 days. Now we need to see how much of that damage can be offset with seed size and improved pod set. Look for reductions in corn and soybean ratings from USDA this afternoon, reflecting the stress of last week’s hot dry pattern across much of the Midwest. That is largely expected. The question now is, where do we go from here, with ratings expected to at least stabilize in the next couple of weeks. StoneX expects to release its first customer-survey-based production estimates tomorrow afternoon, with other private production estimates in the days that follow.
