May 30 – Stock futures are mixed to higher this morning as traders digest a deal inked on Sunday designed to avert a debt crisis here in the United States. The deal doesn’t solve our nation’s debt problem, but it averts the immediate risk of default. As such, the VIX dropped to trade near 17 this morning, reflecting easing concerns on Wall Street. The dollar index dropped with Treasury yields to trade near 104.1. Yields on 10-year Treasuries are trading near 3.74% this morning, while yields on 2-year Treasuries are trading near 4.54%. Crude oil prices are 2% lower ahead of this weekend’s OPEC+ meeting, while the grain and oilseed sector is mostly lower as well, reflecting the broader weakness in the commodities.
We have a deal! President Biden and House Speaker Kevin McCarthy reached a deal on Sunday that suspends the debt ceiling until January 1st, 2025. That puts off another potential showdown on the debt ceiling until after the 2024 presidential election, but that also means that the next deal will be negotiated by a lame duck Congress, and possibly a lame duck president. That could be good or bad, depending on your perspective. Reuters reports that the deal caps some spending over the next two years, speeds up the permitting process for some energy projects, pulls back unused Covid funds, and re-introduces work requirements for some aid programs. It also reportedly reduces the amount of money available for the IRS to hire auditors. However, the spending cuts and work requirements are less than Republicans wanted, and the deal largely leaves Biden’s signature infrastructure and green energy plans intact. Reuters also reports that interest payments will still eat up an increasing share of the federal budget in the decades ahead, but that’s misleading. Interest payments are expected to eat up an increasing share of the federal budget in the next few years. The math is pretty simple on that. As such, I anticipate that this growing challenge to pay a rapidly expanding interest obligation on our national debt will complicate the debt ceiling talks being conducted by a lame duck Congress and possibly a lame duck president a year and a half from now, and perhaps it will be a major issue in the next election.
Yet, Wall Street hasn’t popped the champagne corks quite yet. This deal still has to move through Congress this week. The first obstacle will be the House Rules Committee. McCarthy is confident that the 99-page bill will be approved by the rules committee, although some members have indicated they may not support it. Passage there would set up a vote by the full House of Representatives tomorrow. A Senate vote could stretch into the weekend, where its unique rules give greater power to individual members to stall legislation, and at least one member of the Senate has indicated an interest in doing so. As such, we may have a bit more drama on this issue to go.
Saudi Arabia is in active talks to join China’s New Development Bank, which is also known as the BRICS bank, according to Monday’s edition of China Direct, published by our Shanghai office. The NDB was built to facilitate funding and to mobilize resources for the China initiated Belt and Road projects among BRIC countries, which includes Brazil, Russia, India, China, and South Africa, in addition to the UAE, Uruguay, Bangladesh, and Egypt. These talks are seen as a significant step toward including Saudi Arabia in BRIC as the largest global crude oil exporter. That would greatly diversify the financial options of BRIC nations to conduct business with the yuan, displacing the dollar in their transactions. Saudi Arabia’s application to join the BRIC coalition is expected to be taken up at the August meeting of the group. The NDB just issued its largest yuan-denominated bond Monday, shortly after taking steps to add Saudi Arabia. This latest bond is for 8.5 billion yuan ($1.2 billion), indicating an increased demand for issuing and lending based on the yuan.
Weather models continue to pull rains forward in the forecast for the dry U.S. Midwest from roughly June 8th and beyond. Heat will stress crops this week, with the first crop condition scores for this year’s corn crop expected to be released by USDA after the markets close this afternoon. The rains beyond June 8th will provide welcome relief, but the challenge will be to get crops to that point. Doing so improves our opportunity to produce a big crop this year with an El Nino weather pattern taking shape. I certainly believe that this year’s corn and soybean crops have the genetic potential to reach USDA’s projected yields – or even exceed them in an El Nino year. But the challenge they’ll need to overcome will be the dry soil profiles heading into the growing season. Heat should be less of a problem this year, and we’ve certainly seen the resiliency of modern-day genetics in recent years when dryness was an issue, so I’m not yet ready to count out this year’s crops like many on social media are currently doing. I started out as an agronomist four decades ago, and I’ve seen a lot of years when the crop was considered lost, only to surprise us on its ability to produce. I was also one of the first to call for a sub-130-bushel yield in 2012. It’s still the end of May. Each year seems to find some portion of the Midwest struggling with drought. That’s par for the course. Getting through the next 10 days will be the greatest challenge. Some very wet and highly productive crop years started out dry, and this still may be one of them. That doesn’t ease the pain of those currently battling drought, but again, I’m focused on the big picture supply and demand fundamentals that will be impacting prices going forward.
