Perspective: Morning Commentary for January 9

January 9 – Stock futures pared back yesterday’s big gains, as traders began to backtrack their expectations for quick rate cuts by the Federal Reserve, as yields on 10-year Treasuries probe above 4% once again. The VIX is trading near 13 this morning, while the dollar index is trading near 102.3. Yields on 10-year Treasuries are trading near 4.01%, while yields on 2-year Treasuries are trading near 4.36%. Crude oil prices are 1% higher as price rebound from yesterday’s big selloff amid lingering Middle East concerns and Libyan production shutdowns. Grain and oilseed prices are mixed as they consolidate following yesterday’s big losses across much of the broader commodity sector.

There’s a presidential election in Taiwan this weekend, with far reaching geopolitical implications. The two primary candidates are Vice President Lai Ching-te of the Democratic People’s Party (DPP), and Hou Yu-ih, the mayor of Taipei City, repenting the Kuomintang (KMT). The DPP platform wishes to maintain momentum toward Taiwan independence generated during the current administration, while the KMT wants to improve relations with Mainland China. Chinese authorities have already stated that a DPP victory would be problematic, raising the likelihood of increased tensions between China and Taiwan, as well as between China and the United States. China does not want war with Taiwan and/or the United States, at least not now, but it would likely test the newly elected president with stepped up incursions and periodic blockades that would increase the risk of a strategic miscalculation or military accident that could lead to war. Regardless, a deterioration of relations with China can be expected. On the other hand, a KMT victory would be favored by China, as it would move Taiwan closer to a desired peaceful reunification. As such, China would likely reduce incursions and military activity around Taiwan, as it builds on efforts to reunify Taiwan through peaceful means.

Make no mistake about it, that China fully intends to take control of Taiwan in the end. It would prefer to do so through peaceful means, maintaining the resources and infrastructure of the island nation while minimizing risks of a direct war with the United States, but it will do what is necessary to achieve its goal in the long run – at least that’s its intention. China must also decide which U.S. president it would prefer to deal with, should it believe that a confrontation is necessary, considering the approaching U.S. elections in November of this year. Again, its preference is no confrontation and no war, but the over-riding core value is that it believes that it must take possession of Taiwan – be it now, next year, 10 years from now, or whenever. President Xi Jinping has promised that he will do so, and he’s already pushing above 70 years of age. It’s a goal he has that he intends to fulfill before he chooses to leave office, and that has significant implications for China – U.S. relations, and trade between the two nations involving commodities, goods, and services.

Fed fund futures place 62% odds of a Federal Reserve rate cut at the March meeting this morning, down from more than 80% last week. The odds are pulling back, but they still reflect expectations of a rate cut. The market still expects more than 100 basis points to be cut by the end of this year. Keep in mind that the market expected significant rate cuts in 2023 last January as well. They didn’t happen, and the stock market rallied anyway. I’m not predicting the stock market, but rather focused on the expectations that inflation will rebound in 2024, rate cuts will disappoint, and that the Fed will face tough decisions about trying to contain interest rates at a time when government spending increasingly competes in the credit market. That will eventually have an impact on the commodity sector, likely later in the year.

China continues to purchase soybeans for import, but at a sluggish pace as any sense of panic regarding Brazilian weather appears to be absent. Chinese buyers are focused on buying Brazilian supplies for January and February shipment, largely because they’re cheaper than U.S. supplies, and they don’t have to deal with the logistics problems of the Panama Canal or the Red Sea. In fact, Brazilian soybeans purchased for shipment in February are nearly $1 per bushel cheaper shipped to China than supplies coming from the U.S. Gulf. Yesterday’s USDA export inspection report reflected just one cargo of soybeans loaded out of the U.S. Gulf headed to China due to these logistics problems. China has thus far booked 6.8 million metric tons of soybeans for February shipment, with 4 mmt of that total coming from Brazil, where basis offers provide little indication of concern over short supplies due to adverse weather that it has suffered through during the current growing season.