May 13 – Stock futures had a positive tone overnight as this week’s focus shifts back to inflation once again. We’re scheduled to get data on the producer price index tomorrow morning, followed by April consumer price data on Wednesday. Those numbers should provide Wall Street with confirmation on whether we’ve turned the corner on inflation once again – seeing numbers again trending lower toward the 2% target – or whether reinflation remains a problem for the Federal Reserve and for the U.S. economy. Market expectations are that we will see numbers this week that confirm that we are on a path toward 2%, but we’ve had more surprises to the upside than to the downside thus far this year. The VIX is trading near 13 again this morning, albeit with a firmer tone, while the dollar index is trading near 105.1. Yields on 10-year Treasuries are trading near 4.46%, as they continue to consolidate just below 4.5%, while yields on 2-year Treasuries are trading near 4.83%. Crude oil prices are modestly higher this morning, while the grain and oilseeds markets are mixed, with wheat prices higher again on Russian production worries, while corn and soybean prices were modestly lower following Friday’s gains.
China’s total social financing that is the fuel to economic activity fell to its lowest level since 2005 in April, reflecting nearly record low credit demand from business enterprises, households, and even government. The primary drag was from an unexpectedly low movement of government bonds, which account for roughly 40% of social financing, primarily used to fund infrastructure and facilities to stimulate the economy. Furthermore, new bank loans totaled 730 billion yuan ($101 billion) in April, down from market expectations of 1.2 trillion yuan ($166 billion). Enterprise mid- to longer-term loans totaled 410 billion yuan ($57 billion), down from 667 billion yuan ($92 billion) the previous year and down from 1.6 trillion yuan ($221 billion) the previous month. Household loans, primarily used for mortgages, totaled a record low 167 billion yuan, suggesting that more problems lie ahead for China’s property sector, with little benefit to this point from government efforts to turn the sector around. China’s producer price index that measures inflation for industrial products ex-factory prices fell for its 19th consecutive month in March, while today’s consumer price index data showed declining momentum for shelter, with rental prices dropping another 0.1% month-on-month in March.
Grain and oilseed prices pushed higher Friday, following what previously would have been seen as a bearish USDA WASDE crop report. New-crop corn stocks were pegged at 2.1 billion bushels, soybeans at 445 million, and wheat at 766 million bushels. The corn and wheat numbers were below the average pre-report trade guess, but they are still high numbers. The soybean number came in modestly above the ATG. Yet, prices rallied. They did so because fund managers are no longer trading the “commodity deflation” mantra of the past two years. Friday’s CFTC commitment of traders report confirmed that fund managers have been actively unwinding short positions in these markets, even amid ample supplies, as the focus shifts toward reinflation. Yes, there are fundamental stories out there, but these stories would have been met with skepticism a short time back. It’s yet to be seen whether this new-found optimism will actually find confirmation of sufficient bullish fundamentals, leaving us vulnerable to downward corrections like what we’ve seen in the energy sector. One of the keys will likely be this week’s inflation data. This week’s data will go a long way toward shaping either a continuation of reinflation fears, or easing those concerns, leaving fund managers more comfortable having short positions again where appropriate.
Small crops get smaller, and Russia’s wheat crop is getting smaller. Back-to-back bumper crops enabled Russia to export record quantities of wheat at cheap prices over the past couple of years, setting the tone for the world wheat market. Major exporter supplies outside of Russia and the United States have been relatively tight through that period, but it didn’t matter much to the markets, since Russia had plenty of wheat to export at cheap prices. That looked to be the case until / unless supplies from Russia would be threatened. That may be the case this year. It’s still quite early, and there is plenty of time for today’s numbers to change in either direction. But we know that the southern half of Russia is having a dry spring. Recent showers narrowed the area under immediate stress to perhaps one-third of the belt, but the overall pattern is still in place, and the next four to six weeks are critical for the crop’s development. Now it is also becoming apparent that recent frosts did more damage to Russia’s winter wheat crop than previously reported as well, adding to its production woes. Local analyst SovEcon lowered its 2024-25 Russia wheat production estimate to 89.6 mmt, down from 93 mmt previously, while IKAR dropped its estimate by 5 mmt to 86 mmt. USDA pegged it at 88 mmt on Friday, although it’s unclear if that’s just its initial estimate regardless of weather, or whether that’s reflective of its knowledge of problems. Dropping Russia’s crop below 85 mmt would be expected to start impacting its exports to the point where the market would start shifting its focus more to tighter stocks in other major exporting countries. Weather over the next four to six weeks will be a major factor in that.
