June 3 – Stock futures were again weaker overnight as investors assess the current tariff negotiation progress – or lack thereof – ahead of this week’s jobs data. The VIX is trading near 18 this morning, while the dollar index trades near 99.2. Yields on 10-year Treasuries are trading near 4.43%, while yields on 2-year Treasuries are trading near 3.93%. Crude oil prices are 1% higher, continuing to test the upper end of the range traded over much of the past couple of months as recession odds continue to slide, while the grain and oilseed sector was mostly higher overnight, with the exception to some profit taking on the recent rally in Minneapolis wheat.
What’s up with 30-year Treasuries? We’re seeing increased focus in recent days on the long end of the yield curve, which continues to show strength relative to the short end of the curve. I’ve focused a lot over recent months on the strength of the 10-year yields relative to the short end of the curve, arguing that the dynamics behind this shift in the curve are in part indicative of the growing fiscal debt problem. But the 30-year is making a stronger argument currently, as rising fiscal debt continues to provide a supply of debt certificates at a time when the demand for those certificates is softening. I’ve spoken extensively about the rising supply of certificates, but why is demand softening?
There are several reasons for the softer demand for longer-term Treasuries. For one, we have foreign buyers from some countries who now see improving rates in their own markets after several years of low or negative returns offered. Japan is a good example of that. On the other hand, China has less desire to invest in our economy, considering the rising geopolitical tensions between our two countries. But there are other investors who have lower confidence in those long-term yields in light of feared / anticipated inflation risks. Why lock in current long-term rates as an investor if inflation may top those rates longer-term, particularly if fiscal spending remains on its current course? Improving returns in recent weeks in the equities provide another attractive option for some investors. The decline in demand for the longer-term Treasuries results in lower value for those Treasuries, which pushes yields higher seeking new demand. One solution being considered is for the Treasury Department to focus more on issuing shorter term Treasuries to service its debt. That could put more upward pressure on the shorter end of the yield curve, while taking pressure off the longer end if it chooses to move in that direction. This is something that the struggling housing market is certainly going to be monitoring, as it hopes for some rate relief to spur demand for housing. We still face a shortage of housing in the United States, but buyers are reluctant to make a commitment at current mortgage rates amid the uncertainty in the economy.
President Trump will talk with Chinese President Xi Jinping this week, according to reports from the White House, but will that make a difference? It’s always better to talk than not to talk, but we need to be wary of building too high of expectations about these possible talks. President Xi has China’s long-term interests in mind, and that includes his desire for China to have the world’s largest economy and strongest military – the two are necessarily intertwined in his mind. That means toppling the United States from its current position as a world leader. Xi doesn’t need to worry about winning the next election – he’s the supreme leader of China for as long as he would like to be president. On the other hand, President Trump is serving his final term, and as such, he doesn’t need to worry about getting re-elected either, although he does need to worry about the future success of his political party. President Trump also has longer-term goals of sustaining the United States position as a world leader, and he is trying to reverse the trends in trade and investment that are currently facilitating Xi’s goals. As such, the differences are not likely to be worked out in a single phone call, nor is either side likely close to giving in to the other’s demands. President Xi believes that he has the upper hand currently, despite the negative impact of the trade war on China’s economy. That’s because he controls the message in China, and thus he maintains strong domestic support. Meanwhile, President Trump must fight a continual barrage of legal and political battles to sustain this fight. Xi believes that he won’t have to give up anything in negotiations if he merely waits long enough for Trump’s opponents to win one of those legal battles.
USDA reports that 93% of the nation’s corn crop was planted as of June 1, along with 84% of the soybean crop. That matches the five-year average for the week for corn progress, while soybeans are going in 4 points faster than the average. Most of the Midwest remains ahead of normal, while delays are focused on southern and eastern portions of the Midwest, where farmers have more time to plant, even if it is a few days after the crop insurance deadline. Most of these areas have a couple of more days of planting before rains return. As such, prevent planting of corn is expected to be relatively low this year, with growing season weather still the primary focus going forward. The models keep putting heat and dryness into the longer-term outlook, but thus far it fails to move forward to verify.
