Perspective: Morning Commentary for May 9

By: Arlan Suderman, Chief Commodities Economist

Tue, 09 May 2023, 13:49

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

May 9 – Stock futures traded under modest pressure overnight, as negotiations finally begin on raising the nation’s debt ceiling as the deadline approaches, Russia blitzes Ukraine with missiles and China’s import and export data reveals problems. The VIX is trading near 18 this morning, reflecting concern, but no overriding fear on Wall Street. The dollar index is trading near 101.8 in early trade. Yields on 10-year Treasuries are trading near 3.51%, while yields on 2-year Treasuries are trading near 4.02%. The broader commodity complex also came under modest pressure overnight, with crude oil prices nearly 1% lower this morning, and grain and oilseed prices mostly lower as well.

President Biden and Speaker of the House Kevin McCarthy will finally meet to discuss a negotiated solution to raising the U.S. debt ceiling today. The House of Representatives has already passed a bill to raise the debt ceiling while restraining spending, which the president calls unacceptable. The president wants a clean increase in the debt ceiling with no restrictions or limitations, which House Republicans call unacceptable. The U.S. Senate has been unable to pass any bill on raising the debt ceiling in the current round. The U.S. is in danger of default if something doesn’t happen by the first week of June. Technically, we’ve already hit the debt ceiling, but the U.S. Treasury Department is doing creative accounting to buy us time until sometime around the first of June.

Wall Street assumes that the Democrats, led by the president, and Republicans in the House will do what they always do regarding the debt ceiling – fight until the last minute before the limit is finally raised again, averting catastrophe until the next deadline. The risk though is that neither side gives, and we hit the deadline. For now, this is a topic of conversation on Wall Street, but that’s about all. It will take on increasing importance as we draw closer to June 1st. In the end, the debt ceiling will likely be raised, but that will not remove the longer-term problem of rapidly escalating debt with higher interest rates that is expected to swallow the federal budget over the next several years, leading to higher taxes, a suppressed economy, monetizing of our debt, the devaluation of our dollar and increasing inflation problems. That will be the greater story that will result from Washington failing to fix the problem, and that reality will be on us in the next several years. The last piece of that puzzle – inflation – typically has a bullish effect on commodity prices, which is where our interest lies.

Russia celebrated Victory Day today by parading troops across Red Square and bombarding Ukraine with missiles. Russian President Putin addressed the crowd in Red Square by saying, “A real war has been unleashed against our homeland,” blaming the West for his invasion of Ukraine. He threatened troops fighting to capture Bakhmut in eastern Ukraine with treason if they left their post, even as the commander of the unit complained of the lack of ammunition to maintain the fight. At least 25 missiles were fired primarily at Kyiv today, whereas Ukraine claims that it shot down 23 of them. It was the second consecutive night for a major air strike from Russia, and the fifth so far this month as Russia sought its first victory in more than half a year ahead of today’s Victory Day celebration. The fear is that Russia will continue to escalate the weapons that it uses to gain the victory that it thought it would have after a few days of fighting nearly 15 months ago. On a related note, Russia blocked inspection of ships in the “safe corridor” for the past two days, raising more questions about whether the Ukraine grain initiative will be extended beyond its May 18 deadline.

China cancelled the previous purchase of another 10.7 million bushels of U.S. corn overnight, according to USDA. China still has more than 100 million bushels of old-crop U.S. corn on the books, but traders now wonder how much of that will also be cancelled in the days and weeks ahead. Demand remains soft in China, but it had been making purchases in an apparent attempt to rebuild its reserves. However, Brazil’s crop now looks to be a big one, which means it will have a cheaper alternative available in another 45 to 60 days. China’s soybean imports slowed in April, but that was largely due to new policies requiring tougher inspections that slowed offloading of boats. Demand remains sluggish in China for a broad spectrum of commodities, suggesting a decline in demand for the products produced with those commodities, and that appears to be the case as well. Chinese exports were up 8.5% year-on-year in April, but that’s off a low base last year during Covid restrictions and lockdowns, and it’s down from the 14.8% increase the previous month. Meanwhile, overall imports were down 7.9% year-on-year.

USDA reports that 49% of the U.S. corn crop was planted as of Sunday, exceeding the five-year average of 42%. Yes, just 1% of North Dakota was planted, and it’s wet again this week in the northern Red River Valley, but the market is not concerned yet. Spring wheat planting at 24% lags the five-year average of 38%, and that does have the market concerned. Soybean planting progress is at 35%, ahead of the typical pace of 21%. Commodities faced modest headwinds overnight, and this morning’s news does little to change that momentum. The path of least resistance is again lower as we start another day of trade in the commodity space.

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