July 9 – Stock futures reflect expectations of another record day on Wall Street, even as Treasury yields creep higher ahead of two days of Congressional testimony from Federal Reserve Chair Jerome Powell, and ahead of key inflation data to be released later this week. The VIX continues to trade at historically low levels just above 12, while the dollar index is trading near 105.1. Yields on 10-year Treasuries are trading near 4.29%, while yields on 2-year Treasuries are trading near 4.63%. Crude oil prices continue to slowly retreat from last week’s 11-week high above $84 per barrel as the energy industry quickly moves toward recovery following Hurricane Beryl’s Monday landfall on the Texas coastline. Grain and oilseed prices were mixed to firmer overnight following yesterday’s big losses, although the confidence of the market bulls has truly been shaken by recent price action.
Fed Chair Jerome Powell will testify today before the Senate Banking Committee at 10 a.m. Eastern Daylight Time, before repeating his performance tomorrow morning at the same time before the House Financial Services Committee. Wall Street hopes / expects Powell to lay out a framework for rate cuts in his testimony. That’s the expectation built into the markets, so anything less would be a disappointment. Recent comments coming out of various members of the Fed have largely focused on the need for patience in rate policy, while also focusing on the resiliency of the economy allowing them to have the opportunity to exercise that patience. I anticipate that we’ll hear something similar today, although we can never underestimate to human desire for our comments to be popular with our audience.
And Powell has certainly experienced a lot of political pressure to cut rates when he has previously testified before these committees. I believe that is one reason why he has been willing to speak of future possible rate cuts as early as the December 2023 Fed meeting, when nothing has yet been done. In fact, it was his premature mention of rate cuts that has largely made those cuts impossible to do yet to this point, due to the stimulatory nature of the comments. It may take 12 – 18 months for rate hikes to be fully felt by the economy, but Powell has learned that it only takes the mention of possible cuts to immediately stimulate the economy. Of course, key to Fed rate cut decisions will be the inflation data, which will be updated on Thursday and Friday of this week, after his Congressional testimony. The Federal Open Market Committee is next scheduled to meet to discuss monetary policy at the end of this month, with the market currently pricing in 95% odds of no rate changes at the meeting, but with 75% odds of a cut at the September meeting.
China will release key inflation data on Wednesday, with expectations that its stagnant economy will show near zero price gains as job losses mount and consumer buying slows. A private industry survey of more than 30 market-leading companies in China, representing the property sector, e-commerce, financial firms, and the green energy sector, found that half of them cut their work forces last year. They cut staffs to reduce costs amid a slowing economy. All five housing developers reported broad layoffs last year as well. E-commerce giant Alibaba cut employees by 12.8% last year, after cutting 7% the previous year. Securities and wealth management firms slashed salaries as well. China’s Longi Green Energy Technology, the world’s largest maker of solar panel materials, expects to layoff 5% of its workforce. Auto sales are seen as an important measure of consumer sentiment in China. Data shows that passenger car sales totaled 1.767 million in June, down 6.7% year-on-year, as the overall demand for cars dwindles amid an ongoing slump in consumer confidence. This also comes at a time when both Europe and the United States are applying massive tariffs to block the import of Chinese autos, with other countries now considering the same. The challenges for China’s economy continue to mount ahead of next week’s Third Plenum conference for shaping economic policy in China.
The remnants of Hurricane Beryl are currently tracking into the southern Midwest amid expectations that they will bring much-needed moisture to portions of Missouri, Illinois, Indiana and Ohio over the next couple of days. That moisture is expected to boost corn and soybean yield potential in the region, which could make up for losses from the June flooding in the northwest Midwest. National crop ratings are not perfect, but they’re the best thing that we have to take the emotions out of assessing crops, and they’re the envy of the world for doing that job. The crop ratings don’t account for changes in harvested area, but they do a pretty good job historically of telling us what the yield potential is for those acres that will be harvested. Both the corn and soybean crop ratings currently remain above historical averages, suggesting that trend or higher national average yields are still possible. Based on current demand projections, that would suggest new-crop corn ending stocks north of 2.2 billion bushels, with new-crop soybean ending stocks continuing to have a “4” handle. That explains their current price weakness.
