Perspective: Morning Commentary for February 9

February 9 – Stock futures found support from earnings optimism overnight, while the dollar followed Treasury yields lower, even as the Russian / Ukraine conflict trends toward further escalation. Yet, the VIX continues to trade near 19 this morning, reflecting relative calm on Wall Street. The dollar index traded notably lower this morning near 102.7. Yields on 10-year Treasuries are trading near 3.58%, while yields on 2-year Treasuries are trading near 4.43%. Crude oil prices are 1% lower this morning on rising inventories, while the grain and oilseed markets were mixed following yesterday’s USDA monthly WASDE crop report.

First-time claims for unemployment benefits rose to 196K in the week ending February 4, up from 183K the previous week, and above analyst expectations of 192K, although still at a relatively low level. The four-week moving average fell to 189.25K claims, down from 191.75K the previous week. Continuing claims for the week ending January 28 rose by 38K to 1.688 million. That’s still a low number, but the longer-term trend has been creeping higher. That’s what’s necessary unfortunately to bring the number of job openings in line with the number of available workers. The latest JOLTS data shows that there were more than 11 million job openings posted, with roughly 5.7 million workers chasing those jobs, leaving employers bidding against each other for the workers they wanted. That’s what’s behind the current wage inflation that continues to support rising inflation pressures in the service sector of our economy.

The commodity world has its eyes on the economic recovery in China. India’s population will top China’s this year, so we can no longer say that China is the world’s most populous nation. But China is still the global market mover when it comes to commodity consumption. Fitch Rating boosted its estimate for economic growth this year to 5.0%, up from 4.1% previously on the faster-than-expected rebound after Covid spread through the population quicker than expected, with consumers anxious to get out from under three years of restrictions and lockdowns. But it’s been a mixed recover to this point. Consumers have been quick to return to restaurants and to entertainment centers, while also actively traveling around the country to increase economic activity. However, big-ticket sales remain quite slow for things like electric cars, property, etc. It’s true that the consumer is anxious to spend money on those things that brings some sense of normalcy back to life. But big-ticket items tend to be bought more by business owners, etc. who struggled financially due to the Covid restrictions over the past several years. As such, it’s going to take time for them to recover. Nonetheless, we should see a resurgence in demand for energy and the consumption of higher protein foods based on this recovery, which is supportive for the commodities.

Commodity prices surged when the world’s breadbasket went to war. Russia’s invasion of Ukraine nearly a year ago sent commodity prices soaring higher on fears that supplies out of this major commodity exporting region would tighten at a time when the world had become comfortable with just-in-time supplies. In fact, the war did tighten supplies. Yes, shipments continued out of Ukraine, albeit at a slower pace. The same thing could be said for Russia, as it felt the impact of global sanctions. Yet, the world found a way to get by on these tighter supplies, traders wearied of the daily headlines, and the market gradually removed the war premium. But those supplies remain tight, and the risks are still increasing. Russia is increasingly slow-walking inspections of ships exporting grain from Ukraine under the grain initiative and talks to extend the initiative beyond March 19 aren’t making much progress. Furthermore, the war itself is intensifying, risking escalation into a broader regional conflict that could further risk commodity exports from the Black Sea Region. Russia is said to be building up resources for a spring offensive, while the West contributes tanks to Ukraine. In fact, Ukraine claims this morning that it is on the cusp of getting fighter jets and long-range missiles from Europe to use in its war with Russia. This war is escalating, rather than wearing down. As such, the risks to the commodity sector are increasing, rather than going away.

USDA confirmed Wednesday that Argentine corn and soybean crops are rapidly getting smaller due to this year’s drought, with more reductions likely in future reports. The drought and the crop prospects are looking increasingly similar to the 2008-09 growing season when Argentina produced a 32 million metric ton soybean crop. The big question at that point will be the capacity of barges to move soybeans down out of Brazil on the Parana River to crushing facilities at Rosario. Brazil will have the crop. The question will be logistics. The answer to that question will impact demand for U.S. soymeal over the coming year.