November 29 – Stock futures had a cautiously firmer tone overnight as traders prepare for a low volume holiday trade in today’s shortened trading session. Many traders are absent today, having taken the kids to grandma’s house for the Thanksgiving holiday. There’s little economic data out today to drive price action, other than that traders are monitoring “Black Friday” retail sales in the United States to get a sense of the nation’s economic health ahead of next month’s Federal Reserve meeting. The business channels are focused on this week’s tariff threat from incoming President Trump directed toward Canada, Mexico and China. The VIX is trading near 14 this morning, while the dollar index is trading near 106.1, after falling to its lowest level since November 12th at 105.6 overnight. Yields on 10-year Treasuries are trading at new lows for November near 4.20%, while yields on 2-year Treasuries are trading near 4.18%. Crude oil prices are 1% higher this morning, while the grain and oilseed markets mixed to higher in holiday trade volume.
Europe’s inflation is starting to heat up again, despite a stagnating economy that risks slipping into recession. That puts monetary policymakers in a difficult situation, needing to decide whether to hike interest rates to contain inflation, or to cut rates to stimulate the economy. Europe’s consumer price index rose to 2.3% in November, up from the target rate of 2.0% the previous month. In reality, the jump in year-on-year inflation was largely due to a very low base rate a year ago, so the European Central Bank will likely be looking at stimulative rate cuts going forward, but it will be keeping its eyes on the inflation rate. The primary question for Europe is whether the ECB will cut its benchmark rate by 25 basis points or 50 basis points. One of the factors that the ECB will be watching closely will be Trump’s threat of tariffs on products exported to the United States. The fear is that the tariffs will slow demand for products produced in Europe that might provide a further drag to its economy, with a strong dollar adding to its economic problems. China’s economy continues to struggle, so adding Europe to that list creates more of a drag on the global economy, which impacts energy demand as much as anything.
The Japanese yen rallied to a fresh six-week high today, setting it up for 3% gains on the week. The rise in the yen is a product of rising inflation in Japan – a country where deflation has been the primary problem for years. Headline inflation rose to 2.2% in November, with core inflation rising to 1.9%. As such, the market is pricing in expectations that the Bank of Japan will hike its benchmark interest rate by 25 basis points when it meets in a few weeks. That may increase the tendency for Japanese investors to bring more of their money back home. That increases the risks that we could see fewer Japanese investors buying U.S. Treasuries at a time when the supply of U.S. debt certificates continues to rise to record high levels. Yet, Treasury yields are falling today on expectations that the Federal Reserve will be cutting its benchmark rate by 25 basis points on December 18 – the same week that the BOJ is expected to raise its rate.
American’s spent an estimated $6.8 billion in online shopping on Thanksgiving Day, while they’re expected to top that with more roughly $11 billion in spending today. However, retailers are also reporting a surge of brick-and-mortar shoppers today as American’s seek to revive the traditional shopping spirit of post-Thanksgiving shopping. It’s yet to be seen how much this brick-and-mortar shopping will result in actual spending, but it is a positive sign. The strong dollar creates challenges for exporting U.S. commodities and goods, but it also increases our buying power on the global market.
The ceasefire negotiated by France and the United States between Israel and Hezbollah in the Middle East earlier this week was violated within the first 24 hours by Hezbollah. This increases the risks that we could continue to see an escalation of tensions in the Middle East, with crude oil prices working their way higher this morning. In reality, the conflict between Israel and Hezbollah and Israel and Hamas does not directly have much of an impact on commodity prices, other than raising freight rates for commodities that have to avoid the Red Sea / Suez Canal due to risks presented by the Iran-backed Houthis. However, the longer that these conflicts linger, the greater the risk that Iran gets pulled into the conflict, and that would dramatically increase the risks for energy supplies.
USDA released weekly export sales data for the week ending November 21 this morning. It showed that exporters saw strong demand for U.S. soyoil, soymeal, and soybeans during the week. The soybean buying was driven by demand for China, although that is expected to quickly dry up over the next 30 to 60 days as cheaper Brazilian new-crop supplies become available. However, the strong demand for soyoil and soymeal is largely a product of oversupply here in the States that is driving prices lower to create that demand.
