March 6 – Stock futures moved cautiously higher in the wake of this morning’s private sector jobs report, with traders still braced for this morning’s JOLTS report, tomorrow morning’s weekly jobless claims, and Friday morning’s government monthly jobs report. Traders will also be listening closely to testimony later this morning from Federal Reserve Chair Jerome Powell when he appears before Congress. The VIX is trading near 14 this morning, while the dollar index is trading near 103.5. Yields on 10-year Treasuries are trading near 4.14%, while yields on 2-year Treasuries are trading near 4.56%. Crude oil prices are nearly 2% higher this morning, as they bounce back from yesterday’s losses, as OPEC+ cuts overshadow soft demand concerns. The grain and oilseed markets were quietly mixed to weaker in overnight trade as the market waits for Friday’s USDA WASDE crop report.
The private sector created 140K jobs in February, up from 111K in January, but below analyst expectations of 150K jobs created. This sets the stage for Friday’s big government jobs report, even though they don’t correlate that well. The bottom line is that the number trended higher from the previous month, and the previous month was revised slightly higher as well. Weekly jobless claim numbers during February make an argument for a strong jobs report on Friday that will make it difficult for the Fed to cut its benchmark interest rate when it meets later this month.
Fed Chair Jerome Powell will testify before the House Financial Services Committee at 10 a.m. Eastern Time, when he will provide his mandated semiannual monetary policy report to the committee. His prepared comments, released earlier this morning, indicate that he will say that “It will likely be appropriate to begin dialing back policy restraint at some point this year.” He is also expected to say that the Fed’s policy rate is “likely at its peak for this cycle.” His prepared comments also say that the “economic outlook is uncertain; ongoing progress to 2% inflation is not assured.” In other words, his perceived dovish comments following the December meeting created obstacles for the Fed to reach the 2% mandate, as stocks surged to record highs and consumer sentiment spiked. As such, the Fed has now shifted hawkish with its statements, while trying to remain transparent. Their current emphasis is on “risks to both cutting rates too early and too fast as well as too late or too little.” The market expected rate cuts in 2023. That didn’t happen, but the stock market hit new highs. The market expects rate cuts again in 2024. The question again is, will it happen, even as Congress continues to stimulate the economy ahead of the election?
Analysts are parsing words in the statement released from this year’s China Government Work Report, looking for language changes from the previous report. Unlike in the past, no press conference was held following the event, putting even more emphasis on word changes in the vast document. One change of note that we found is related to China’s position on Taiwan “reunification.” Past reports included language stating China’s commitment to “peaceful reunification.” Those words were omitted when the document was released this week, and they were replaced with its commitment to “advance the cause of China’s reunification firmly.” This is a highly significant change with possible relevance to the commodity markets, as China is the world’s largest importer of commodities.
President Xi Jinping previously promised that he will “reunify” Taiwan to Mainland China. The goal would be to do so peacefully, as he did Hong Kong. That plan was complicated when the DPP won the presidential election in Taiwan in January on a platform of independence. Xi Jinping is 70 years old. He’s watching the U.S. presidential campaign play out, and he is weighing his timeline versus who might be in the White House for the next four years starting in January. The Work Report released this week included a moderate 7.2% year-on-year increase for China’s defense budget, which doesn’t sound any alarm bells regarding China attacking Taiwan in the current year, although it likely would prefer a successful takeover via a blockade rather than outright attack that could destroy the island nation’s super-chip production capability. The question would be, will whoever is in the White House at the time challenge the blockade, or simply put on trade sanctions to punish China instead? Most military analysts would argue that China will not make a move on Taiwan this year, and they may be right, but they said the same thing about Russia invading Ukraine in early 2022. It’s a potential black swan event that we need to continue to monitor.
Russian wheat prices continue to slide as it seeks to export as much wheat as possible ahead of this year’s harvest. That continues to pressure world prices, which then also weigh on corn prices as well. The next fundamental factor that could support a rally in corn prices would be a weather problem with Brazil’s big winter (safrinha) crop. Forecast models have leaned dry for the critical April pollination period for the past couple of months, raising concerns that we could see a significant shortfall in the crop. Yesterday they leaned wetter for April. That’s just one run, and it may merely be an aberration, but it certainly threw cold water on rally hopes for the time being.
