September 8 – Stock futures were again under modest pressure overnight, as chatter increases about the upcoming Federal Reserve meeting and a possible government shutdown at the beginning of next month. The VIX is trading near 14 this morning, indicating that there’s no panic on Wall Street, although caution is building. The dollar index is trading near 104.9 this morning. Yields on 10-year Treasuries are trading near 4.23%, while yields on 2-year Treasuries are trading near 4.93%. Crude oil prices are modestly higher in early trade, while the grain and oilseed sector is quietly mixed to weaker ahead of the weekend.
Another political showdown over funding the government may be in the works if Democrats and Republicans fail to reach agreement on a bill to fund operations prior to the beginning of the next fiscal year on October 1st. Those spending bills typically start in the House of Representatives as a package of 12 funding bills for each of the major budget sectors. Just one of those 12 bills has thus far been approved to this point, and that doesn’t include the negotiations that will have to happen between the House version and the Senate spending priorities. Government shutdowns aren’t that rare – this would be the fourth of the last decade if it occurs – and they tend to have little impact on the economy typically, and therefore little impact on the markets.
But this time may be different. House Republicans reportedly want to trim $120 billion off the $1.590 trillion line for discretionary spending agreed to by House Speaker Kevin McCarthy and President Joe Biden several months ago in the debt ceiling negotiations. What they’re not talking about is that the current annual interest bill on our national debt is $673 billion or equal to 42% of that discretionary spending budget line, and that number is growing as debt certificates mature, requiring them to be renewed at today’s higher interest rates. Fitch lowered the U.S. credit rating earlier this summer because of the volatile political environment in Washington, D.C. that shows little sign of addressing our national debt problems. S&P already lowered its rating in 2011. Another showdown will once again highlight the problem, risking a debt downgrade by Moody’s, which has not yet addressed the problem. Those credit downgrades result in higher interest rates for our national debt, increasing the budget problems, but they also result in higher interest rates for the average consumer and homeowner as well. Treasury yields are trending higher, as the securities market does the work that the Fed has thus far failed to accomplish. Rapidly increasing federal spending continues to increase the supply of debt certificates being supplied to the market at a time when the Fed is unwinding its balance sheet by reducing its demand for those same debt certificates by $1.14 trillion per year as fiscal spending adds a trillion or so of supply. The only way to bring supply and demand together for these debt certificates is for their yields to rise to attract new buyers, and that’s what the market is doing. A failure of Washington to address this issue over the next several weeks may add to those interest rate hike risks by the market, and that presents a risk to both the economy and to the markets.
China’s domestic soybean crush totaled 2.16 million metric tons last week, marking the eighth consecutive week that crush exceeded 2 mmt per week. Calendar year to date crush totals 63.37 mmt, up nearly 10% from the previous year’s pace of 57.75 mmt. However, year to date soybean imports through the period totaled 71.65 mmt, up 10.33 mmt or nearly 18% from the previous year’s pace. That means that China imported 8.28 mmt more soybeans than it crushed thus far through the first eight months of the marketing year, with the surplus going into its reserves. The question is, will it draw from these reserves over the next several months to reduce the extra costs of moving soybeans through the Panama Canal this year, reducing imports from the United States, and to what extent will it do so? We already expect its imports of U.S. soybeans to be reduced over the next several months due to the large amount of Brazilian soybeans that it has purchased for shipment during the period. Its decision on whether to pull these soybeans out of reserves, and to what extent, will likely be influenced by its perception of how the Brazilian growing season starts.
It should be noted that China is also building big reserves of crude oil believed to be over 1 billion barrels, or a 66-day supply. August imports were the second highest on record at 12.78 million barrels per day. China is stockpiling essential commodities at a time when President Xi Jinping coincidentally has stopped attending meetings with the West, pulling out of the latest G-20 Summit. On the other hand, Beijing will be hosting the 10th anniversary meeting of Belt and Road Initiative countries next month, with leaders from over 90 countries already confirmed to attend, out of the 152 countries currently participating in the BRI. These are mostly developing countries with which China is tying its economy, seeking to advance the use of its currency. Ironically, use of the yuan still consists of just over 3% of all global trade. Advancement of the yuan is struggling as it falls to a 16-year low near 7.35 to the dollar as China’s foreign exchange reserves continue to drop. China needs to add more stimulus to its economy, but its wary of further weakening its currency.
