July 8 – Stock futures are cautiously upbeat this morning, while the commodities generally came under pressure overnight, reversing Friday’s holiday gains. Hurricane Beryl made landfall earlier today in South Texas, and there are once again hopes for a cease-fire in the Middle East. The focus will be shifting to inflation once again as we move through the week, with consumer price data scheduled for release on Thursday and producer price data on Friday. The VIX is trading below 13 again today, while the dollar index steadies following last week’s weakness, trading near 104.8 this morning. Yields on 10-year Treasuries are trading near 4.30% as they bounce following last week’s break, while yields on 2-year Treasuries are trading near 4.63%. Crude oil prices are 1% lower on those cease-fire hopes, although losses are limited by concerns about Beryl’s impact on the energy sector. The grain and oilseed sector traded mostly weaker overnight as wheat harvest gains momentum in the Plains and on expectations that the current weather pattern is generally favorable for U.S. crops.
Last week’s weekly and monthly jobs data reflected a slow softening of the job market, creating hopes on Wall Street that we will see a rate cut from the Federal Reserve by its September meeting. This week the focus will be on updated inflation data once again. The consumer price index has been above 3% for the past several years. The June data, to be released on Thursday, is expected to show the headline number slip to 3.1% year-on-year, while we see a small uptick in the month-on-month data to 0.1%. However, core inflation that excludes food and energy prices is expected to hold steady at 0.2% month-on-month, while ticking higher to 3.5% year-on-year.
The Federal Reserve continues to digest all of this data, and thus far I don’t believe that it sees anything to warrant a rate cut at this time, based on the criteria that it has previously said that it is following to make its decision. Keep in mind that the Fed has repeatedly stated that it would rather error on the side of waiting too long to cut rates than to repeat the mistake of 1980 and cut too soon. It does not want to find itself chasing inflation once again. Meanwhile, the economy continues to show some resiliency. Yes, there are sectors of the economy that you can say have been in a recession. But the economy as a whole continues to sluggishly move forward, removing any real impetus for the Fed to cut rates – risking doing so too soon. Members of the Federal Reserve are human, and none of us likes continually hearing criticism for our policies, and so that may result in them eventually yielding to pressure to make a cut. But that aside, the criteria outlined by the Fed still does not indicate a rate cut.
June’s surge in housing sales in China quickly evaporated in the first week of July. I recently wrote how policy support had resulted in a surge in housing sales in China providing the first glimmer of hope for that sector over the past several years. However, the resulting decline in inventory was rather small, suggesting that the sector still had a long way to go to restore confidence in China’s economy. Data for the first week of July suggests that momentum quickly waned, with house sales in 21 Chinese cities surveyed by CREIS falling nearly 40% week-on-week, while also down nearly 4% year-on-year and remember that last year’s sales were weak as well. Furthermore, the CREIS survey of six representative cities showed that property inventories fell by just 1.2% week-on-week, and that they remain near multi-year highs. The focus now shifts to the Third Plenum economic policy meetings mid-month to see if authorities announce any other economic measures that will restore confidence in the economy.
The Fourth of July holiday is known for its volatile price action for the grain and oilseed sector when the markets reopen. That’s largely because the weather models tend to look deep into the time of corn pollination when we come out of the holiday break, providing some indication of whether the crop will be at risk or not. A forecast calling for heat and dryness during pollination tends to lead to active fund buying, while the opposite tends to be true as well. Prices firmed on Friday, but they came under pressure overnight, with traders anticipating active harvest pressure in wheat and generally favorable conditions for corn and soybean development going forward. The intensity of rains have eased for saturated areas of the northwestern Midwest, but the rains haven’t shut off either. Further south and east, showers have increased for dry areas of the central and eastern Midwest. In fact, the remnants of Hurricane Beryl are expected to bring much needed rain to portions of the eastern Midwest this week. Temperatures remain seasonally favorable over the next couple of weeks.
USDA will release its updated crop balance sheets on Friday, incorporating acreage and stocks data from its June 28 reports. I do not expect a change in its yield estimate on Friday. The bottom line is that Friday’s report is expected to show new-crop corn ending stocks above 2.2 billion bushels, with soybean stocks still boasting a “4” handle as well. Neither market is immune to a weather risk, but such a risk is not yet apparent to the market either.
