Perspective: Morning Commentary for September 15

By: Arlan Suderman, Chief Commodities Economist

Wed, 15 Sep 2021, 13:34

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

September 15 – Tapering and taxes are the focus of Wall Street this week, leading to an escalation of nervousness as stocks trade just below record high levels. The VIX is trading near 19 this morning – reflecting elevated anxiety, but without signs of panic. The dollar index is trading above 92.5 in early trade, while yields on 10-year Treasuries are trading near 1.29%, after hitting a new three-week low near 1.26% earlier this morning. Crude oil prices hit fresh six-week highs above $72 this morning amid declining supplies, while the Ags were generally higher as well amid strength in the broader commodity sector.

The Empire State manufacturing index rose to 34.3 this month, up from 18.3 the previous month and nearly double the 18.6 anticipated by analysts. New York is the first to report its manufacturing index each month, setting a positive tone as it did so today. A number above zero designates month-on-month growth for the sector. Firms responding to the September survey indicated that new orders, shipments, and unfilled orders all increased substantially this month as escalated demand continues to drive the economy. Labor indicators also pointed to strong growth in both employment and in the average workweek. Both the prices paid, and prices received indices were at or near record highs, according to the New York Fed, with firms remaining very optimistic about the future.

Wall Street initially rallied on Tuesday following favorable inflation data showing a much calmer-than-expected consumer price index for August – the slowest monthly increase (0.3% month-on-month and 5.3% year-on-year) in over a year. Yet, Josh Cannington, StoneX Vice President of Interest Rates, noted in his commentary Tuesday that mentions of inflation in corporate earnings reports are at a record high, with executives in general agreement that the root issues of inflation will take years to resolve. The Fed’s focus on macro-economic data to form its policy decisions is missing the boots-on-the-ground reality faced by both consumers and corporate leaders. Yet, he notes the bottom line is that the different perception of inflation conveniently creates space between the present and the need for tapering and rates hikes.

China has another Covid outbreak. This one is still contained for now in the Fujian province, but the new case count topped 50 in each of the past two days. China will likely control it once again, as it has previous outbreaks, with its zero-tolerance policy of lockdowns and testing, but at a price. Today’s China Direct from our Shanghai office goes into detail about the impact on China’s economy. Inflation at the wholesale level is high, much of which is exported around the world. However, August domestic retail sales rose just 2.5% year-on-year, falling short of analyst expectations of 7.4% growth and down from 8.5% in July. Consumer spending is slowing, in part due to these travel restrictions and lockdowns. KFC reported a 50 – 60% decline in third quarter profits due to restaurant shutdowns. Restaurant retail sales were down 4.5% in August, while grocery store spending rose 9.5%. Airline passenger numbers were down 56% year-on-year in August. Covid cases outside the Fujian province are essentially zero. But what if you sit on a plane that also contains someone who crossed paths with someone from the Fujian province that later tested positive? You could find yourself in quarantine for a couple of weeks. The odds may be very small, but the mere possibility is negatively impacting China’s economy.

“Unknown destinations” (perceived to be China) cancelled 7.2 million bushels of previous soybean purchases over the past 24 hours, while China cancelled another 4.9 million bushels. The cancellations created a stir in the trade this morning. Perhaps they were $14 beans that can now be purchased for a lower price. Perhaps other factors were in play. It certainly wouldn’t be the first time that cancellations preceded big purchases on a price break either. Regardless, it’s not the kind of news that feeds the bulls. Ironically, the move comes amid high Chinese crush margins near $2 per bushel. Soyoil stocks are down 34% year-on-year, while meal stocks are down 19% year-on-year. Soybean stocks at 6.4 million metric tons are down 15% year-on-year. August feed production was up 6.5% month-on-month and up 14.9% year-on-year. More significantly, hog feed production was up 6.9% month-on-month in August, while up 41.7% year-on-year. China needs soybeans. They just need to be able to load boats at the ports of New Orleans. Three facilities are currently loading boats, with others slowly getting power and restoring operations now that Hurricane Nicholas is gradually leaving the area. December corn futures finally broke through the topside of Friday’s broad trading range on the charts overnight, while soybeans remain with that range. In the end, the market needs to see demand, and harvest results from the field, which should come in the days ahead.

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