May 14 – Stock futures are mixed to weaker this morning after the Biden Administration escalated tensions with China by sharply increasing tariffs on a wide array of products coming from China, while traders are also digesting this morning’s inflation data. The VIX is trading closer to 14 this morning, based on the above, as nerves escalate a bit on Wall Street. The dollar index initially followed Treasury yields higher on this morning’s inflation data, but those markets are settling back closer to pre-report levels currently as the trade explains away this morning’s hotter inflation numbers, with the dollar index trading near 105.0. Yields on 10-year Treasuries are trading near 4.46%, while yields on 2-year Treasuries are trading near 4.83%. Crude oil prices are 1.5% lower, while the grain and oilseed markets are mixed to weaker as well. Sharp losses for soyoil led to double-digit losses for soybeans after used cooking oil missed the tariff list this morning.
The headline producer price index rose 0.5% month-on-month in April, up from analyst expectations of 0.3%. The March number was revised to -0.1%, down from +0.2% previously, partially accounting for the big jump in April. The headline PPI rose 2.2% year-on-year in April, matching analyst expectations, but up from a downwardly revised 1.8% in March. The core PPI that excludes the more volatile food and energy components also rose 0.5% month-on-month in April, up from analyst expectations of 0.2%, and up from a downwardly revised -0.1% in March. The core PPI rose 2.4% year-on-year in April, exceeding analyst expectations of 2.3%, but matching the previous month’s pace. The PPI excluding food, energy and trade services rose 0.4% month-on-month in April, up from 0.2% the previous month. It was up 3.1% year-on-year in April, up from 2.8% in March. These numbers certainly caught the attention of traders this morning, putting even greater importance in tomorrow’s consumer price index data. Traders will be listening for a response to the data from Federal Reserve Chair Jerome Powell when he makes a public appearance later this morning.
The Biden Administration hiked tariffs on $18 billion in Chinese products as we approach the 2024 elections, including everything from electric vehicles to batteries to critical minerals to medical products. The move was widely anticipated, as it has been talked about in Washington for weeks. China immediately vowed retaliation, calling for the United States to reverse action. U.S. imports of Chinese products totaled $427 billion in 2023, while exports to China totaled just $148 billion. The move is expected to escalate a trade war with China, while increasing tensions between the United States and the Communist Party of China heading into the U.S. election cycle. The next question for the commodities will be, how will these escalated tensions affect China’s decisions about when to take steps to “reunite” Taiwan? Such a move would raise the risk of U.S. sanctions negatively impacting commodity flow to China, while also escalating the risk of war in the Taiwan Straits.
Today’s announced sanctions will certainly provide additional challenges for China’s economy. Many items on the list were items specifically being targeted by China for developing its economy – such as electric vehicles. China hoped to turn its economic fortunes around by targeting the EV and technology sectors by creating attractive products for export. The tariffs make those exports more challenging. China has many other economic stimulus tools at its disposal, but many of them would end up cheapening the yuan if implemented at a time when the United States continues to maintain a strong interest rate policy. The yuan is already trading just below some of its weakest levels of the past 15 years at a time when China wants it to be seen as a strong alternative to the dollar. We recently reported that China was utilizing a portion of its foreign exchange reserves to quietly sell the dollar while supporting the yuan.
CONAB – Brazil’s version of USDA – raised its estimate for this year’s soybean crop to 147.685 million metric tons this morning, up from 146.522 mmt in April. The agency lowered its yield estimate while citing excess rains in Rio Grande do Sul where 20% of the crop remains unharvested. Yet, its overall production estimate was increased in today’s estimate of the crop that is largely harvested already. USDA lowered its estimate of the crop by 1 mmt on Friday, but still left it at 154 mmt, up considerably from CONAB’s estimate. CONAB also raised its all-corn production estimate to 111.636 mmt, up from 110.964 mmt previously, whereas USDA lowered its estimate to 122 mmt on Friday. Brazil’s cash market has been behaving more like it believes USDA’s numbers. USDA pegged U.S. corn planting progress at 49% as of Sunday, with soybean planting progress at 35%. The corn number is a 5 points below the five-year average for the week, while the soybean number is 1 point above average. The current planting pace really is not concerning. However, the forecast does give reason to start raising concerns, with relatively narrow planting windows anticipated over the next couple of weeks. The American farmer does an amazing job of getting the crops planted each year, but doing so in a timely manner that supports good yield potential will be a bit more challenging than what we’d like to see this year.
