November 9 – Stocks are cautiously upbeat to start trade today, with traders awaiting comments from various members of the Federal Reserve today. The VIX is trading near 14 this morning, marking another seven-week low for Wall Street’s “fear indicator.” The dollar index is trading near 105.5 in relatively quiet trade. Yields on 10-year Treasuries are trading near 4.53%, after posting a fresh six-week low earlier in the session, while yields on 2-year Treasuries are trading near 4.95%. Crude oil prices roughly 1% higher today in a technical bounce, after falling to fresh 16-week lows on Wednesday. Grain and oilseed prices are mostly weaker ahead of today’s USDA WASDE crop report.
First-time claims for unemployment benefits dropped to 217K in the week ending November 4, down from 220K the previous week, and below analyst expectations of 220K. The four-week moving average rose to 212.25K claims, up from 210.75K the previous week. Continuing claims for the week ending October 28 rose another 22K to 1.834 million, with the four-week moving average rising by 32,250 to 1.789 million. Much of the recent data reflected a softening jobs market, which would take pressure off the Fed to raise its benchmark interest rate. Today’s continuing claims data for the week ending October 28 continues to support that notion, but the weekly claims data for the week ending November 4 does not. However, there is not enough in this one report to sway the markets in either direction. Rather, the markets will likely take more away from the comments of several Fed members scheduled to speak today, in addition to Fed Chair Jerome Powell speaking this afternoon.
Deflation in China? China’s consumer price index fell by 0.2% year-on-year in October, after being flat in September. The CPI was down 0.1% month-on-month, led by a 4% year-on-year drop in food prices. Core inflation that excludes the more volatile food and energy sectors rose 0.6% year-on-year in October, down from 0.8% growth in September, suggesting softening domestic consumption. That’s alarming, considering that consumption was expected to surge in October, thanks to an 8-day national holiday early in the month. China’s producer price index ex-factories fell 2.6% year-on-year.
China made more soybean purchases on Wednesday, leaving this week’s purchases thus far at more than 40 cargoes, which is far above the typical 25 – 30 cargoes per week pace. USDA confirmed more of these purchases in its flash sale announcement with notice 38.4 million bushels going to China and another 24.3 million going to “unknown destinations.” Cash sources indicate that the bulk of this week’s purchases are mainly by China’s state-owned Cofco and Sinograin, who are the purchasing arm for China’s national reserves. The bulk of this week’s bookings have reportedly been of U.S. origin. Meanwhile, commercial buyers – both private and foreign owned soybean crushers – have remained silent, reluctant to move before they see more evidence of a crop issue in Brazil. Any signs of panic seem to be by China’s state buyers, while there is little sign of panic over Brazil weather concerns from private buyers to this point.
Why is China concerned? It, like many others in the industry, fear that USDA may reduce its yield estimate for this year’s crop in its monthly WASDE crop report today, further tightening the U.S. balance sheet. That would leave little room for a short Brazilian crop. It’s been excessively wet in southern Brazil this year, but most of the focus is on the dryness in Center-West Brazil. My friend Eric Snodgrass of Nutrien Solutions accessed the historical weather data for Center-West Brazil, finding that the correlation between November rainfall and final yield in the region since 1977 has been just 0.09. The correlation is much higher for southern Brazil, but rarely do we see a big yield drop in Center-West Brazil from dry Novembers. China may not want to take a chance that this will be the year that it does matter.
A surge of buying lifted wheat prices Wednesday after a rumor hit the market of a Russian missile hitting a civilian ship in the Black Sea. Chicago wheat prices were already challenging the 50-day moving average, making speculative traders holding large short positions nervous. The rumor created added momentum for exiting short positions, despite overall ongoing weak demand amid large supplies of cheap wheat coming out of the Black Sea, illustrating the headline risk of these markets. Confirmation eventually came in that an anti-radar missile struck the superstructure of a Liberian flagged iron ore carrier while entering one of the ports at Odessa, resulting in casualties. The ship was intending to haul iron ore from Ukraine to China. This was the 21st attack on Ukraine port facilities since Russia pulled out of the Black Sea Grain Initiative, resulting in damage to 160 infrastructure facilities and to 122 vehicles, according to Ukrainian authorities.
However, prices have since pulled back from yesterday’s highs as the market digests the events of the day. There is little evidence that the ship was a target of the missile, but rather it appears to have been an errant hit by the missile intended for a different target. As such, it does not appear to represent a change in strategy by Russia toward going after ships moving commodities out of Ukraine. However, it does highlight the risks that shippers must consider when doing business with Ukraine – that their ships and crews are at most risk during the time that they are in port in Ukraine, and this is a risk they must consider in continuing to do business with Ukraine. Ukraine will likely keep its grain prices cheap enough to keep shippers coming unless we see enough frequency of these incidents to make them wary of doing business.
