June 28 – Stock futures were mixed this morning, with chip stocks under pressure amid fears that the United States may do more to curb exports of artificial intelligence chips to China, while traders are also braced for comments from Federal Reserve Chair Jerome Powell later this morning when he addresses a policy panel in Europe. He is expected to again hint that at least two more rate hikes will occur this year, maintaining his hawkish tone of previous appearances. This week’s data would certainly support that to this point. Meanwhile, the rising geopolitical risks surrounding Russia have not gone away, but they’ve slipped below the headlines and out of the immediate focus of traders. The VIX slipped back below 14 overnight as a complacency returns to Wall Street. The dollar index rallied, despite weakness in Treasury yields overnight, trading near 102.9. Yields on 10-year Treasuries are trading near 3.75%, while yields on 2-year Treasuries are trading near 4.75%. The broader commodity sector faces modest headwinds from the stronger dollar this morning, with crude oil prices modestly weaker at two-week lows, while the sell-off in the grain and oilseed sector continues amid wetter forecasts for dry areas of the Midwest.
Ukraine will not agree to any peace plan that keeps it frozen in conflict with Russia, according to its president, Volodymyr Zelenskiy. Ukraine’s president spoke today on the need for a resolution that would bring the war to an end, while holding Russia’s leaders accountable for their attack on his land. The only peace plan that he will accept, according to Zelenskiy, would be a plan that removes Russian troops from all occupied land, pushing them back to the original borders from 1991 when Ukraine won its independence from Russia. Anything less than that would keep Ukraine mired in conflict with Russia, according to Zelenskiy. Meanwhile, analysts are still waiting for Russian President Putin’s next actions to re-assert public confidence and fear in his leadership, which includes the war in Ukraine. The unknown of what that next step might be continues to leave a measure of risk hanging over the commodity markets. Traders have not yet really factored that into a risk premium, but they are certainly monitoring developments for that possibility.
Marriage registrations in the first quarter of this year rose by 40,000 year-on-year in China to 2.147 million, but that was still nearly half the 4.282 million registrations posted 10 years prior. Having a child out of wedlock in China is taboo, so lower marriages means lower birth rates for the country, which is already seeing its population in decline due to China’s previous one-child policy. It has since raised that to three children, but the one-child policy is deeply engrained into the culture, and within marriage, which is in decline. Meanwhile, divorce registrations increased by 127,000, which was more than triple the increase in marriage registrations during the period, further threatening the birth rate. The declining birth rate, which is worse than Japan’s, is a longer-term threat to China’s economy.
Wetter trends continue for Midwest forecast models, with good model agreement that the shift in pattern is happening currently. A better temperature gradient is developing across the Midwest with increased moisture availability. The primary storm track appears to be Nebraska east and southeast to Ohio, which may leave an area of concern in place as we’ve stated over the past month in the northwestern 30% of the belt. Fortunately, much of that area just received moisture over the past week, but more will be needed. Further south though, it appears that much of this very dry area will see good 1 – 2” rains in the coming week, with follow-through rains looking likely with a much more active pattern in July.
A similar flip in 1992 saw both corn and soybean yields recover to reach above-trend levels, as I outlined in yesterday’s comments. Can the same thing happen this year as well? Yes, it can, but I’m not ready to go there until/unless I see better rainfall trends next month for those drier areas in the northern area of concern, including northern Iowa, Minnesota, Wisconsin, and the Dakotas. The rainfall pattern in this area remains uncertain, and more than a quarter of our nation’s corn acreage is in this region. The current outlook suggests that we’ll see mild temperatures to ease stress levels on the crops, but confidence is low for that as well in the northwestern belt – particularly the Dakotas into parts of Minnesota where heat could build. So yes, I still can’t rule out a trend yield, or even an above trend yield. But the odds would currently suggest that we’re looking at something below trend, although not likely far enough below for corn to offset poor demand. The market is expected to focus on the supply side of the equation over the coming weeks, with demand a greater factor once the trade feels like it has a handle on the size of the crop.
