September 27 – Stocks are trying to bounce this morning, following yesterday’s big losses, as Treasury yields pull back, while the dollar continues to push higher. Some support comes from data showing that industrial profits in China, while still negative, are starting to show some signs of improvement. The VIX pulled back to trade near 18 this morning, after rising to four-month highs above 19 on Tuesday. The dollar index is trading near 106.4, after posting yet another fresh 10-month high in today’s trade. Yields on 10-year Treasuries are trading near 4.51%, while yields on 2-year Treasuries are trading near 5.07%. Crude oil prices are 2% higher on tightening global supplies, while the grain and oilseed markets are pushing modestly higher ahead of Friday’s USDA reports.
Congress has four days to pass legislation to fund the government to avoid a partial shutdown that would start on Sunday. It would be the fourth shutdown of the past decade if it happens, and that likelihood appears to be increasing today. The Senate passed a stop-gap bill Tuesday that would fund the government through November 17, while also providing domestic disaster aid and another $6 billion in aid to Ukraine, but the House isn’t expected to even consider the bill. Instead, the House is working on a series of funding bills focused on different sectors of the government, as Congress used to do routinely. That may be how Congress used to do it, but the risk currently is getting them all passed in such a short amount of time. House Speaker Kevin McCarthy said that the House will likely bring its own version of a stopgap bill to the floor on Friday.
Major Industrial firm profits in China are improving, according to data released on Wednesday, although they’re still down 11.7% year-on-year January through August. That’s an improvement from the -15.5% posted the previous month. Revenue for those firms improved marginally, down 0.3% year-on-year, which is an improvement from the 0.5% decline posted previously. This suggests that the profit recovery is largely related to lower input costs. The report surveyed 41 different industrial categories, with 16 turning positive in August, up from 13 previously, while 25 remained negative. Privately owned firms reported profits down 4.6% year-on-year through August, which is an improvement from the -10.7% reported previously. The U.S.-China Business Council’s annual survey adds a bit different perspective to the Chinese economy. It shows that customer-related businesses that focus on food, energy and consumer goods are quite optimistic, while the technology sector is pretty depressed. The latter is most negatively impacted by intense competition and deleveraging by the United States and by Europe.
China’s central bank held its quarterly meeting on monetary policy on Wednesday, vowing again to do what was necessary to support the economy. The meeting brief noted ongoing external challenges due to a slowdown in international trade and investment, coupled with weak domestic demand. It promised to keep liquidity reasonably ample and to maintain stable credit expansion. Analysts believe that the central bank will become more aggressive in supporting the property sector in the weeks and months ahead. It is also expected to step up support for building infrastructure, urban villages, and social housing, while offering support for the ailing yuan. That’s a challenge though when the dollar continues to strengthen.
China’s soybean purchases sagged for the third consecutive week last week. Market sources within China reported just eight cargoes of soybeans purchased last week, down from 15 cargos the prior week, and below the seasonal pace of 20-30 cargoes per week. China has nearly covered its demand for October, purchasing about 11 million metric tons for October shipment, with about 40% supplied from Brazil and Argentina. In addition, China has committed 4.3 mmt for November, nearly half the quantity needed for November shipment, of which 40% was from Brazil. Soybean coverage for December and January remains extremely slow, with almost all of the 11-12 mmt needed for those two months remaining uncovered. Meanwhile, Brazil’s ample supply encouraged active purchases for next year’s demand. China booked more than 2 mmt of Brazilian soybeans for February next year, covering 30% of demand for that month. The market is currently focused on Brazil’s early-season weather developments, where it continues to be dry as farmers wait for the start of the monsoon rains to plant. A continued delay would be expected to delay the harvest and availability of new-crop supplies, but it’s a bit early to draw too many conclusions about that yet. Early planting would lead to early harvest, likely resulting in fewer purchases of U.S. soybeans between November and January, while the opposite would be true as well.
