June 4 – Sentiment leaned upbeat on Wall Street this morning, as the major indices hovered near their multi-month highs, and the broader commodity sector reflected modest tailwinds as well. The VIX slipped below 18 this morning, while the dollar index traded near 99.0. Yields on 10-year Treasuries are trading near 4.41%, while yields on 2-year Treasuries trading near 3.92%. Crude oil prices were modestly higher as they consolidate just below the top of the range that has largely confined prices over the past couple of months, while the grain and oilseed sector was mostly higher as well again this morning.
The private sector created just 37K jobs in May, according to this morning’s ADP Employment report, down from 60K jobs created in April, and below the 110K job creations expected by analysts. This sets a sobering tone for Friday’s government jobs report, although the correlation is not that good. Nonetheless, today’s reported total for the private sector fell below the lowest of the trade guesses heading into the report – in fact it was nearly half of the lowest estimate. The consensus estimate for Friday’s report is that nonfarm payroll increased by 129K in May, down from 177K the previous month.
Ukraine dealt Russia another strategic blow on Tuesday when it struck the only bridge connecting Russia to the occupied Crimean Peninsula. Ukraine mined piers along the road and rail structure known as the Kerch Bridge, detonating the first explosive in the early morning hours. Ukraine acknowledged the attack on the supply line infrastructure, stating that it took several months to fully implement. Traffic was suspended early Tuesday morning, and again later in the afternoon as the damaged bridge was inspected. The underwater pillars supporting the bridge were said to be “severely damaged,” although the bridge reportedly is open for traffic today. The attack comes a few days after a surprise drone attack deep inside of Russia on strategic airbases that are believed to have caused $7 billion in damages while damaging 34% of Russia’s strategic cruise missile carriers that it has been using to pummel Ukrainian cities over the past several years. Direct peace talks between Russia and Ukraine began this week in Turkey, with an initial agreement to exchange thousands of prisoners and the bodies of victims of the war, although the two sides are believed to still be far apart on reaching an actual peace agreement. The recent escalations ratchet up the risk of something happening to deter the movement of commodities through the Black Sea, but that risk is still believed to be well below 50% for the time being. Nonetheless, it is something that traders are monitoring.
Wall Street anticipates a conversation between President Donald Trump and Chinese President Xi Jinping to take place at the end of this week. It hopes that such conversation will lead to progress in the trade talks. Talking is always better than not talking, but we should be wary of expecting a quick settlement to the current tensions. China and the United States are on two separate paths based on conflicting value systems. The United States currently has the world’s top economy and military. China is on a path that it hopes will take that top spot for both sectors. President Trump is challenging its efforts to do so. President Xi sees Trump as a short time interruption. Xi currently enjoys solid popularity at home, where he controls the message. He believes that he can slow-walk these negotiations, hoping that Trump loses one of the many legal challenges filed against him that would bring an end to his tariff war. Xi would then not need to give up anything in negotiations if he can out-wait Trump. His economy is definitely hurting from the trade war, while the U.S. economy continues to show some resiliency. But Xi still believes that he has time on his side. In a related note, two Chinese nationals with alleged connections to the Chinese Communist Party were arrested for smuggling a “potential agroterrorism weapon” via a noxious fungus into the United States to use in their work at the University of Michigan. The fungus in question causes ‘head blight – a disease of wheat, barley, maize and rice that is responsible for billions of dollars of economic loss globally each year. One of the two previously received funding from the Chinese government for working with the fungus in China.
The demand side of the balance sheet is expected to be influenced by the Trump Administration’s biofuel policy in the years ahead, starting with the 2025-26 marketing year. The soyoil and soybean markets in particular will be heavily influenced by learning the scope of demand that will be created by this policy, but that is also true for corn as well. There are three components to that demand story – 1) the RVO blending requirements, 2) the Small Refinery Exemptions, and 3) the 45Z funding mechanisms. The latter will be determined by Congress, while the first two are up to the Trump Administration. The House tax bill contained its version of the 45Z funding mechanism, and it was generally considered favorable for demand, but we don’t know what might happen in negotiations with the Senate in the weeks ahead. The Trump Administration could release its position on the RVOs and SREs any day now. Once these factors are known, the market will focus more the supply side, which will be determined by weather.
