Perspective: Morning Commentary for May 7

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

May 7 – It’s Fed Day on Wall Street, but traders will continue to monitor the tariff headlines as well. Most notable of those headlines is the one that higher level talks will begin this weekend between China and the United States, providing a bit of a morale lift on the Street. The VIX is trading near 25 this morning, while the dollar index is trading near 99.4. Yields on 10-year Treasuries are trading near 4.29%, while yields on 2-year Treasuries are trading near 3.80%. Crude oil prices are modestly lower in a pullback following the big gains of the previous two sessions, while the grain and oilseed markets are mostly higher on the China trade talk hype.

The ice has been broken. China and the United States will hold high level trade talks this weekend in Switzerland. Both sides essentially say that they’re responding to requests from the other to talk, but that’s okay as long as they’re talking. U.S. Treasury Secretary Scott Bessent and U.S. Chief Trade Negotiator Jamieson Greer are expected to meet with China’s economic tsar He Lifeng to begin the talks. Bessent told reporters that the initial steps will be to define what they will talk about. Tariffs by both sides are so high that they essentially act as an embargo, although China has quietly carved out a number of exemptions of products that it needs to ease the impact on its economy, while the U.S. has carved out exceptions for electronics. The first step will be to de-escalate tensions between the two countries, followed by efforts to make progress toward an agreement that lowers tariff and non-tariff trade restrictions. The Phase One trade deal reached during Trump 1.0 took 13 face-to-face meetings between the two sides. The issues are much more complicated this time around, but China has also replaced the hardline negotiator who handled the Phase One talks with a more moderate negotiator for these talks.

I still do not expect to see a quick deal to restore trade between the two countries. The “embargo” state of trade hurts both countries, although the country hurt the most is typically the country that possessed the biggest trade surplus, and that would be China in this case. One investment bank estimates that the current trade riff between the two countries could cost China 16 million jobs. As such, China announced another round of stimulus today – the biggest since the trade war started – so that it could give the impression of going into the talks from a position of strength rather than weakness. China’s central bank lowered its bank reserve requirement for commercial banks by 50 basis points, which is expected to inject 1 trillion yuan ($138 billion) into the economy. It also cut its policy rate by 10 basis points, along with cutting 25 basis points from its mortgage rate for home buyers. This will widen the gap between rates in China and in the United States, putting downward pressure on the value of the yuan – something that China has been fighting hard to avoid.

“We don’t have to sign deals.” That was a comment made by President Trump on Tuesday as he took questions from reporters. He went on to say that he will sit down with his team over the next couple of weeks to put numbers down on what the United States wants and put that in front of our trading partners. Trump stated that these other countries could either accept those numbers or not. If they accept them, we have a deal. If not, they won’t get access to the U.S. consumer. He said it is as simple as that. He went on to say that we may adjust those numbers if necessary, but in the end, it’s up to whether all these countries – most of which hold a trade surplus with us – want a deal. In other words, President Trump is not saying that we don’t need “signed” deals, but he’s saying that we don’t need “a” deal as bad as what those countries with a trade surplus need “a” deal. That was basically the attitude that he displayed when he and Canadian Prime Minister Mark Carney held a press conference before holding talks on Tuesday. That meeting was said to be cordial at best, with both sides trying to establish a position of strength in front of reporters, and their citizens at home, before entering into the talks. The bottom line is that President Trump enters negotiations with an assumption that the country with the trade surplus needs a deal worse than the country with the trade deficit, and therefore he believes that he holds the better negotiating position – and history would suggest that he’s correct.

Chinese buyers purchased about 15 cargoes of soybeans last week, with the majority of them being Sinograin purchases from Argentina that are expected to enter into China’s reserve. That reserve continues to grow, giving China the freedom to auction them off to crushers later this year when Brazilian supplies dry up, rather than come to the United States for cargoes. USDA estimates that China’s surplus supplies on September 1 will be roughly 44 million metric tons, but they could be even larger. Regardless, that would be nearly twice what China purchased from the United States in the current marketing year. Nonetheless, U.S. corn and soybean futures bounced off areas of modest chart support over the past 24 hours, with wheat prices uncovering some buying interest at recent low levels as well. Sustaining a rally in the grain and oilseed complex though likely needs more headline support.

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Perspective: Morning Commentary for May 7

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