June 25 – Stock futures were again mixed overnight, as they consolidate ahead of Friday’s key inflation data, along with Treasury yields. The VIX is trading near 13 this morning, while the dollar index is trading near 105.6. Yields on 10-year Treasuries are trading near 4.25%, while yields on 2-year Treasuries are trading near 4.74%. Crude oil prices pulled back modestly as they consolidate below the $82 per barrel mark, while the grain and oilseed markets were mostly lower overnight despite a significant drop in U.S. corn and soybean ratings Monday afternoon.
The Chicago Fed national activity index is a monthly index created to gauge overall economic activity and related inflationary pressure utilizing 85 existing economic indicators. A number above zero denotes growth, while a negative number indicates below trend growth, with a standard deviation of one. The index jumped to +0.18 for May, up from -0.26 in April and well above analyst expectations of -0.40. The three-month moving average for the index slipped to -0.09 in May, down from -0.05 the previous month. The May reading is the second highest reading registered thus far this year, and it comes in well above the -0.17 posted in the same month last year. Breaking down the numbers, the strength of the May data was in the production-related indicators, which contributed 0.23 to the index, up from -0.15 in April. Sales, orders, and inventories contributed -0.02 in May, which was similar to the April reading of -0.01. Employment was neutral in May, versus -0.05 in April. The personal consumption and housing contribution was -0.03 in May, versus -0.06 in April. Today’s numbers are consistent with an economy that’s starting to see some life again in manufacturing, while remaining somewhat sluggish overall, but still too resilient yet at this point to meet the Federal Reserve’s criteria for an interest rate cut.
Chinese President Xi Jinping provided a broad vision on Monday of building China into a strong nation in the areas of science and technology by 2035 in the face of rising opposition from the West. He urged a stronger sense of urgency with more decisive steps for driving self-reliance while emphasizing the need for openness and global cooperation. He remains in full control of China’s position on openness and global cooperation, and ironically the lack of both is one of the reasons that the West is standing in such strong opposition to China. Yet, I believe that in his mind, Xi believes that he is being open and trying to cooperate. Part of China’s problem was illustrated in his belief that the strength of the nation will be grounded in government control, which has always stifled economic activity. Xi emphasized the need to maximize government functions to allocate resources to bolster research and development to make breakthroughs in high-end technology. China continues to grapple with widening fiscal deficits as revenue falls due to sliding property sales. The sale of land use rights is one of the primary sources of revenue for various government entities in China. Finance revenue from land transactions fell by 1.28 trillion yuan ($176 billion) between January and May, meaning that local governments have tighter budgets from which to implement stimulus projects involving infrastructure and facility development.
Corn, soybean, and spring wheat ratings saw significant declines in their condition ratings over the past week, while winter wheat ratings rose on better-than-expected yields coming out of the current harvest. Yet, prices for corn, soybeans and winter wheat all declined overnight, while spring wheat prices posted modest gains. The day session often has a different focus than the overnight market, but the immediate focus appears to have been more on the forecasts that call for saturated areas of the Midwest to dry out a bit this week, while dry areas of the Midwest see increased rainfall. Furthermore, traders took note of the fact that condition index scores continue to be above the long-term average for the week for all of the major crops, suggesting above-trend yield potential, despite the recent declines. That may change in the weeks ahead, but for now, they provide little justification for rationing demand with higher prices. That said, corn, soybean, and wheat prices have seen a significant decline this month, making prices more attractive to end users needing coverage, while discouraging producer selling. Soybeans in particular see relatively few supplies in the farmers hands currently, spurring a need for basis and spreads to periodically move to free up some of those remaining stocks.
Otherwise, the grain and oilseed markets lack a story at this point. Traders are cognizant that Friday’s USDA quarterly stocks and planted acreage reports are known for their market moving surprises, which will likely result in some positioning ahead of the midday Friday release time. The greatest opportunity for a market-moving surprise historically has been in the corn stocks data, although surprises could happen for any of the grains. As for the planted acreage survey results, the average trade estimates reflect expectations for modest increases in acreage for corn, soybeans, and wheat. Surprises are possible there as well, but the primary focus following Friday’s reports is expected to be on July and August weather patterns and their expected impact on yield potential.
