May 22 – Stock futures were mixed overnight as a fresh round of talks to avert a debt ceiling crisis get started today at the White House. The VIX is trading near 17 again this morning, while the dollar index is trading near 103.2. Yields on 10-year Treasuries are trading near 3.69%, while yields on 2-year Treasuries are trading near 4.30%. Crude oil prices are firm in early trade, while grain and oilseed prices are mixed.
President Joe Biden and House Speaker Kevin McCarthy are expected to meet once again today to continue negotiations over raising the debt ceiling. Today’s talks come 10 days before the Treasury Department says it will start to run out of money to meet its obligations. McCarthy said that he had a “productive” call with Biden on Sunday morning, before staffers from both sides met for two-and-a-half hours Sunday evening to continue the talks. Both sides indicate that a default on our nation’s debt is not an option, and that is generally not expected. These talks generally go down to the last minute because that’s when each side has the greatest leverage. However, that may not be the greatest risk. Just getting close to the deadline can result in a downgrade of the U.S. credit rating, which directly and indirectly raises interest rates on both public and private debt. That increases U.S. interest payment obligations, but it also contributes to consumer inflation pressures that slows the economy. That’s a risk that is now coming into the danger zone as these talks linger on.
Wall Street continues to reflect confusion amid contentment. Stock traders are content that the economy can make a soft landing, since the recession that it has feared for the past year remains elusive. Yet, fund managers continue to fear that recession will stifle demand for commodities. As such, the S&P 500 and Nasdaq stock indices both hit nine-month highs on Friday, before pulling back going into the weekend, while commodity prices remain under pressure, trending lower. Meanwhile, the VIX – Wall Street’s fear index – continues to erode lower, trading just above nearly year-and-a-half lows. All of this takes place within rising expectations that the Federal Reserve may not be finished with rate hikes. The Fed is doing what is said it was going to do, but Wall Street is finally starting to believe it, and that doesn’t seem to matter. To a great extent that is due to the resiliency that the economy has shown to this point amid the rapid escalation of rates, and to the belief that the Fed is close to finished raising rates, even if it has one or two left in its bag of tricks. Yet, the commodity bears remain in control of that sector, and there’s little currently to prove them wrong until the data says otherwise.
Twitter is alive with forecasts of a repeat of the 2012 drought this year, or at least something close to that. The forecasts of doom across the Midwest generally do not come from professional weather forecasters, but rather from farmers and commodity analysts. Such talk is an easy sell when commodity prices are collapsing and farmers across the Midwest are undersold of both old-crop and new-crop inventories. They’re looking for a reason for hope that the recent bloodbath in commodity price collapse is temporary, anticipating that a seasonal weather scare will provide another opportunity to sell at profitable levels. Nobody wants a crop failure, but most producers want the market to at least worry about a crop failure to the point that the market rallies to give them a chance to sell.
The fact is, there are pockets of the Midwest that continue to miss out on rains. I’m hearing most from farmers in southeast Nebraska who remain quite dry. Most of the Midwest has indeed seen below-normal rainfall over the past 30 days, but 76% of the belt has still received at least 2” of rain, with 98% receiving at least an inch. It hasn’t been totally dry, except for a few pockets. Talking to a couple of climatologists over the weekend who have done pretty well the past several years, they reassure me that the atmosphere continues to adjust to the El Nino pattern as expected, and that they both expect to see the pattern start to turn wetter for much of the Midwest by mid-June; perhaps as early as the second week of June. They reminded me that warm water episodes – El Nino events – tend to be drier in June before the rains come in July and August.
Corn and soybean prices reached oversold territory during last week’s liquidation phase, so a bounce is not a surprise this morning. Keep in mind that farmers across the Midwest are looking for a bounce that would allow them to catch up with sales. But it’s important to also remember that Brazil farmers are about to harvest a large safrinha corn crop, and that crop is only 30% sold, below the normal pace at this point of 45 – 50% sold. That means that they’re looking for a rally to sell as well. That makes it more difficult to sustain a rally without a bigger story.
