November 6 – There’s little data scheduled for release this week, leaving Wall Street subject to drifting as steered by earnings and by headlines emerging in the days ahead. No less than nine speeches by members of the Federal Reserve are scheduled for this week, which may end up providing those headlines, along with the ongoing war in the Gaza Strip. The most significant data scheduled for release this week looks to be the weekly jobless claims report on Thursday, followed by consumer sentiment on Friday. For now, sentiment is cautiously optimistic following last week’s Federal Reserve meeting that raised hopes of a pivot in the first half of 2024. The VIX is trading near 15 this morning, which is just above Friday’s six-week low, while the dollar index is trading near 105.0 after hitting a fresh six-week low earlier in the session. Yields on 10-year Treasuries are trading near 4.63% this morning, after dipping below 4.50% for the first time in five weeks on Friday, while yields on 2-year Treasuries are trading near 4.89%, after setting a two-month low near 4.81% on Friday. Crude oil prices are 1% higher in early trade, while the grain and oilseed sector is mixed to start the week.
Chinese local governments have issued 8.5 trillion yuan ($1.2 trillion) of bonds year to date, which is nearly double the pace seen pre-Covid. These local government units typically garner a large portion of their income from taxes on property sales, but those property sales are not happening in the current economic climate. It’s alarming that the data shows the surge in bond sales was mainly for these local governments to pay the principal and interest on old debt. China’s central government granted local government entities the right to issue another 1 trillion yuan in bonds in the past month alone, in addition to providing fiscal aid and expanded bond quotas for next year. There has been a surge in property sales in Guangzhou in South China, but that appears to be an isolated occurrence.
A little chaos ensued in China’s money markets last week as banks managed cash flow to close out the month amid official government attempts to keep the yuan from losing additional value relative to the dollar. Reuters reports that routine month-end cash demand within China’s banking system snowballed into a scramble on October 31st that pushed short-term funding interest rates as high as 50%, providing an embarrassment to the central government. The People’s Bank of China and the China Foreign Exchange Trade System, along with bond clearing houses, eventually stepped in to extend trading hours, hold meetings with banks, and to calm the markets. The typical month-end need for liquidity combined with the hoarding of cash ahead of an anticipated big government bond sale, leading to the chaos. China’s big banks were reluctant to loan money due to a government mandate to counter pressure on the yuan. Participants noted that the vulnerability that was exposed will likely remain as long as capital outflows keep the system under pressure. A big piece of fixing that involves healing China’s property sector, and China has thus far been unable to do that.
Official Ukraine customs data indicates that it exported 9.794 million metric tonnes of grains and pulses thus far in the current market year that began on July 1st, down from 14.272 mmt in the same period last year. November shipments thus far total 550k mt, down from 1.07 mmt a year ago. Marketing year wheat shipments total 4.87 mmt, followed by corn at 4.101 mmt and barley at 698K mt. Ships are moving in and out of Ukraine’s ports – particularly ports at Odessa – with increasing regularity, but constant attacks on its port infrastructure are taking a toll. Another missile and drone attack damaged port infrastructure at Odessa overnight, impacting warehouses, unloading equipment and grain cars. Meanwhile, Ukraine continues to develop over land routes as it negotiates with Eastern European countries though which the grain would move to ports, but these channels also increase costs for the grain movement. It is feared that Ukraine farmers will plant fewer crops in 2024 due to low financial returns relative to the risks of farming in a war zone.
Weekend rains were largely 0.50 to 2.25” in Brazil, locally up to 4.75”, with coverage over 50 – 55% of the soybean belt. The rains narrowed the areas of short-term stress to roughly 10 – 15% of the soybean belt, focused on Center-West areas, although the heat returns with just patchy rains until the 11- to 15-day period. Excessive rains in southern areas of Brazil take a break this week, but then they return again next week with another 4 – 8” expected at that point. It’s becoming clear that Center-West looks to continue to battle significantly below normal rainfall conditions as we move deeper into the growing season. Keep in mind that normal rainfall in this area of Brazil is 7” in November, so we can’t just assume that below-normal rainfall will result in low yields. However, the risks are certainly elevated for the growing season. Satellite-based NDVI scores remain near- to slightly above-average for Mato Grosso, despite the dryness, but NDVI scores don’t necessarily correlate well with crop health. They’re just one tool to use in assessing the crop. What matters here is that the trade is focused on the dryness risks, pushing prices through areas of chart resistance, as they build weather premium into the market. Ultimately, Brazil’s problems must result in a significant increase in U.S. soybean sales, and that hasn’t happened yet. That may happen at any point, but we still maintain concerns about the relatively slow pace of sales that are expected to provide a drag on actual shipments as we move forward.
