June 26 – Nvidia continues to be the focus on Wall Street, as traders mark time ahead of Friday’s key inflation data release, with the tech sector continuing to lean on the AI momentum to trade just below record highs. The VIX is trading near 13 again this morning, while the dollar index is strong at 106.0, representing fresh eight-week highs that are providing mild headwinds for the commodity sector. Yields on 10-year Treasuries are trading near 4.30% this morning, while yields on 2-year Treasuries are trading near 4.73%. Crude oil prices are modestly higher this morning as they continue to consolidate between $80 and $82 per barrel, while the grain and oilseed markets are mixed, after giving back overnight gains as U.S. desks opened this morning.
Former Federal Reserve Chairman Ben Bernanke had a dream of increasing transparency for the central bank to ease concerns on Wall Street about future monetary policy direction. That all seems good on the surface, but the law of unintended consequences had other things to say on the matter. Rather than relieve fears, today’s transparent Fed has made Wall Street fixated on Fed policies. I remember the day when we didn’t know about changes in Fed policy until we saw it show up in trades in the market. Traders focused on a plethora of stock and economic fundamental data in making trading decisions. Now everything hinges around a perceived notion about each piece of data that comes out – whether it will influence the Fed to be more hawkish or more dovish. Good news becomes bad news because good economic data might make the Fed more hawkish. Bad news becomes good news because it might make the Fed lean more dovish in policy. As such, bad news supports buying of stocks, while good news supports selling. Ironically, inflation prospects – and therefore monetary policy – is heavily influenced by consumer sentiment, which is largely driven by the stock market as well as gasoline and food prices.
But monetary policy may be losing its influence in the economy as fiscal policy continues to work against it, providing one of the primary reasons why Fed policy has been so ineffective at bringing inflation down to the 2% mandate. The monetary base in the economy continues to trend higher, despite the Fed’s best efforts to reduce its balance sheet by pulling money out of the economy. Fiscal stimulus is a big reason for this rise in the monetary base, with student loan forgiveness and infrastructure projects providing much of the injection into the economy. But this injection of stimulus comes with a price, and that price is the rapidly growing national debt that is now approaching $35 trillion. The annual interest obligation for servicing the national debt is currently at $878 billion and rising on a daily basis, rapidly approaching the $902 billion per year that we spend on our national defense and more than 60% of what we spend on social security each year. It’s difficult to predict what future fiscal policy might be, and there is wide disagreement on the path of future interest rates, but if we continue to follow the current path it would put the national debt at $47 trillion four years from today, based on analysis by USdebtclock.org, with the annual cost of servicing that debt rising to an estimated $2.9 trillion; doubling projected costs for our national defense, while far exceeding what we spend on either social security or on Medicare/Medicaid. The risk there is that we could see further downgrades of our credit rating, putting further upward pressure on interest rates.
Soybeans are starting to back up at crushing facilities and at the ports in China, with an estimated 11.5 million metric tons of soybeans expected to show up at Chinese ports this month alone. That’s significantly higher than the 7.15 mmt that arrived at Chinese ports in June of 2023, and it’s well above the five-year average arrival pace for June at 7.95 mmt. Chinese buyers purchased about 20 cargoes of soybeans last week – a combination of old- and new-crop purchases. That’s down a third from the pace seen in recent weeks as supplies start to back up in China amid sluggish feed demand. Even so, new-crop crush margins continue to encourage deferred bookings, with Brazilian supplies holding a nearly $30 per ton crush margin advantage over supplies booked from the United States. That’s one reason why Chinese bookings of new-crop soybeans remain near zero yet at this point, while advanced sales a year ago were already at 1.72 mmt. Meanwhile, sales of old-crop soybeans to China are down 7.22 mmt or 25% year-on-year as Brazilian supplies remain the cheaper bid there as well.
The grain and oilseed markets lack a story, allowing the momentum-trading Algos to have their way as they continue to short these markets with no fundamental story to force them to change directions. I still believe that the longer-term story will be reinflation, but the short-term story is back to commodity deflation. We see potential reasons that may change that narrative in the days ahead, at least for the time-being. Prices have fallen to levels seen as attractive for end users needing to add coverage, while farmer selling has largely dried up at these price levels. Furthermore, we’re approaching the end of the month and the end of the fiscal quarter for many traders, which may encourage book squaring, as well as a set of USDA reports on Friday known for their surprise.
