Perspective: Morning Commentary for May 16

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

May 16 – Stock futures firmed overnight, although they trimmed gains a bit after the release of housing starts data for April. The VIX is trading below 18 at this hour, dropping to its lowest level since late March this morning, while the dollar index is quietly trading near 100.8. Yields on 10-year Treasuries are trading near 4.40%, while yields on 2-year Treasuries are trading near 3.93%, as the spread continues to narrow again as the tariff war temporarily calms, and amid this week’s lower inflation data. Crude oil prices are modestly higher this morning, while the grain and oilseed complex is mixed to weaker.

Housing starts rose to an annualized rate of 1.361 million as the tariff war peaked in April, up from an upwardly revised 1.339 million in March, and essentially matching analyst expectations of 1.362 million. Permits for new housing starts slipped to an annualized rate of 1.412 million in April, down from 1.481 million in March, and below analyst expectations of 1.412 million. Overall, the housing market remains sluggish amid the uncertainty of the economy, with the dip in permits doing little to boost morale in the industry. Two things that would be expected to give a boost to the housing market would be lower interest rates and greater confidence about the future of the economy. In fact, consumers could even adjust to the higher interest rates if they simply had greater confidence in the future of the economy. That likely will require more trade deals out of the White House, and passage of a pro-growth agenda by Congress. Both could happen, but neither has happened yet.

Abu Dhabi is the capital of the United Arab Emirates, but it also wants to be a global Artificial Intelligence hub. President Trump visited Abu Dhabi this week, using the visit to ink a deal for the UAE to buy advanced AI semiconductors from U.S. companies. That’s a win for the U.S. industry, and it’s a win for the UAE. This week’s meeting in Abu Dhabi is a follow up to a meeting in March when the UAE committed to a 10-year, $1.4 trillion investment framework in the United States in areas including energy, AI, and manufacturing. It’s significant that the UAE inked the deal with the Trump Administration, when it’s largest trading partner is China. That presents some security concerns, but the deal requires the data centers to be managed by U.S. companies. The UAE gets the technology that it wants to become a major global AI hub, the U.S. gets the economic growth, and China gets shut out. The UAE committed to spending more than $200 billion as a part of this visit, including $14.5 billion on American-made Boeing aircraft.

The UAE agreement further complicates the ability to reach a comprehensive trade deal between China and the United States, as it further escalates the tech war between the two countries. Chinese President Xi Jinping established a vision of building a “Digital China” back in 2015, building much of his growth plans for the Chinese economy on the tech sector. That plan was built on the hope and expectation of building an economy on a technology-based economy that placed China at the center of global growth in the field. However, the Trump Administration had previously set a worldwide restriction against the use of Chinese Huawei AI chips, which is a step toward blocking China’s ambitions, making it more difficult to achieve its stated goal of becoming the world’s top economy with the top military – two things that it sees as necessarily intertwined. President Trump’s deal this week with one of China’s strategic trading partners creates more obstacles for its longer-term goals. Trump recognizes that, as does Xi, which will make negotiating a longer-term settlement more difficult. The two countries may have reached a significant agreement to hit the “Pause” button in their tariff war over the past weekend, but they are far from settling the bigger issues that separate them. Perhaps that’s why state media in China this week has been preparing its citizens for a more prolonged and drawn-out negotiation process with the United States.

The Trump Administration tightened sanctions on crude oil coming from Iran, Russia, and Venezuela. That has major buyer China looking elsewhere, and that includes Canada. The heightened tensions between Trump and Canada has our northern neighbor seeking to diversify its options for selling crude oil. As such, China is now the top customer of Canadian crude oil being shipped through the recently expanded Trans Mountain pipeline in Canada. China now purchases roughly 207,000 barrels per day from Canada through the pipeline, up from 7,000 bpd previously. Meanwhile, the Trump Administration states that it is close to reaching a deal on nuclear development with Iran, which could remove sanctions on its crude oil, adding 200-300,000 bpd back to the work market, on top of the 411,000 bpd being returned to the market by OPEC+ this month, and again next month, and possibly again monthly after that. This comes at a time when the future of the global economy – and therefore demand for oil – hinges on the outcome of President Trump’s tariff war. Escalating tariffs sinks us into recession that decreases demand, while negotiating down tariffs could stimulate global economic growth and stronger demand.

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Perspective: Morning Commentary for May 16

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