Perspective: Morning Commentary for January 24

January 24 – Optimism returned to Wall Street overnight as traders respond to positive earnings reports, stimulus for China’s economy, and declining Treasury yields. The VIX is again drifting closer to 12 in early trade this morning, with the dollar index dropping to 102.8. Yields on 10-year Treasuries are trading near 4.09%, while yields on 2-year Treasuries are trading near 4.29%. The broader commodity sector also found strength on the optimism overnight, with both the broader energy and grain and oilseed sectors moving higher.

China’s Central Bank cut its bank reserve requirement ratio by 50 basis points after its markets closed, which is expected to inject 1 trillion yuan ($140 billion) of liquidity into the economy. The move sends a message to China’s ailing financial markets that the government is ramping up efforts to tackle the country’s economic problems. A bold move by the government was essential to turn consumer and market sentiment, which had lost confidence in the government’s ability to turn things around, driving major stock indices to five-year lows. It’s yet to be seen whether this move will be sufficient, but I anticipate that both consumers and market participants will need to see additional steps taken to continue the momentum leading up to its annual “Two Sessions” economic conference in March. The expectation is that China must achieve a 5% growth rate in 2024 to restore confidence, and many analysts believe that will be difficult to achieve. Turning around the property market is a central piece needed to restore confidence among consumers, but it’s also a critical component for funding debt-ridden local government units.

U.S. gross domestic product is expected to come in at an annualized rate of 2.0% for the fourth quarter of 2023 when reported tomorrow, which would be down from 4.9% the previous quarter. Personal consumption expenditures are expected to come in at an annualized rate of 2.5% for the fourth quarter, down from 3.1% the previous quarter. These numbers reflect expectations that the data will show a slowdown in the fourth quarter, but they also show a resilient economy. Wall Street analysts argue that the slowing economy, combined with down-trending inflation, argues for a pivot toward lower interest rates by the second quarter of this year, while the Federal Reserve remains concerned about the resiliency of the economy to hold 2.0% growth that still supports high shelter and wage inflation price pressures. Tomorrow’s data dump will also include durable goods orders numbers for December, with a slowdown expected, while we’ll get key inflation data on Friday morning.

China’s stimulus program noted above helped support crude oil prices this morning, but demand is also getting a boost from cheap Russian prices. Cheap prices cure cheap prices by creating demand, and that is happening due to cheap Russian crude oil currently available on the world market. Most of that cheap Russian oil is going to markets in Asia and Africa, replacing Europe as the primary destination due to multiple sanctions it placed on Russia. Europe used to take 60% of Russian oil exports, but that was prior to the sanctions. Some Russian crude oil – the Urals grade – now finds itself onto the world market at a more than $20 discount to Dated Brent crude, finding willing takers in Asia and Africa that enjoy the cheap energy prices, while also creating a dependency on Russian crude oil. As such, total water shipments of Russian crude oil and condensate jumped 4.4% year-on-year in 2023, despite a 46% decline of those shipments going to Europe.

The U.S. Soybean Export Council pegs Chinese imports of U.S. soybeans in the current marketing year at 30 million metric tons, which is similar to the previous marketing year. But will that really happen? China currently has 20 mmt of commitments for U.S. soybeans for the 2023/24 marketing year, with 15.5 mmt of those already shipped, and 4.6 mmt still unshipped. USSEC’s China director expects China to buy an additional 10 mmt for shipment between February and August, even though Brazilian supplies imported into China are currently about $2 per bushel cheaper than supplies from the U.S. Gulf. That suggests that China would depend on Brazilian supplies for crush, although policy currently does not allow it to import Brazilian supplies for building its reserves. Even so, an additional 10 mmt of U.S. purchases would be significantly above the 4 mmt purchased in the same time period the previous year. USSEC currently projects that China’s annual soybean demand will maintain a 3.1% growth rate, taking total imports to 134.1 mmt per year by 2033. Yet, China’s Ministry of Agriculture’s policy to cut soymeal inclusion in rations has reduced its rate to 13% in 2023, down from 14.5% in 2022, with an ultimate goal of reaching 12.5%. The lower inclusion rate has cut more than 9 mmt of soybean demand. This also comes at a time when per capita pork consumption is eroding and China’s population dropped another 2.08 million people next year.