Perspective: Morning Commentary for February 12

February 12 – Inflation and retail sales will be the focus this week on Wall Street, along with additional data on the housing sector, where inflationary pressures are starting to show up again as well. Stock futures have a mixed to weaker tone this morning as traders anticipate these reports. The VIX is trading near 13 once again, while the dollar index is trading near 104.2. Yields on 10-year Treasuries are trading near 4.17%, while yields on 2-year Treasuries are trading near 4.48% - both of which are sitting just below eight-week highs. Oil prices are modestly lower on profit taking following last week’s rally, while the grain and oilseed sector is mixed to higher as prices bounce following recent losses on massive speculative short positions.

This is a big data week for Wall Street, starting with updated consumer price information on Tuesday, and retail sales data on Thursday. We’ll also see additional housing data released on Thursday and Friday, along with manufacturing data, with producing price data also released on Friday. The major stock indices posted record highs last week ahead of this week’s data, which should provide greater guidance on whether it’s justified. This week’s data should heat up the debate over whether the Federal Reserve is likely to start cutting interest rates in the first half of the year. It has fewer reasons to do so if the economy is doing fine. In fact, one could argue that doing so at a time when the economy is healthy increases the chances of a rebound in inflation, which is something that it has listed as a concern. However, the chances of earlier cuts go up if the data shows a rapidly slowing economy. My bias remains the former, but we’ll see what this week’s data shows. The next Fed decision is still 37 days away.

You’ll hear a lot of rhetoric about South American crops due to this year’s volatile weather, but it only truly matters to the U.S. futures market if it impacts U.S. supplies. That means that we need to a) see evidence that South America’s weather problems will increase demand for current-year U.S. soybean supplies, b) delay planting of Brazil’s winter corn crop to the point of risking production losses, and/or c) see hard evidence that Brazil’s rainy season will end early, dramatically reducing the size of the crop to necessitate greater dependency on U.S. corn supplies. All of that is possible, but thus far we have little evidence that any of the above is occurring. The Brazilian cash soybean market is currently trading at a sharp discount to the U.S. market as abundant supplies flow to export terminals. The Brazil soybean harvest was 22% complete as of Friday, which is ahead of last year’s 16% pace, and slightly ahead of where we’d expect it to be at this time of year. Specifically, 48% of the Mato Grosso crop was harvested as of Friday, up from 46% the previous year. Mato Grosso is traditionally Brazil’s largest producer of both soybeans (28%) and winter corn (47%). Winter corn planting reached 33% for Brazil as of Friday, which is up from 23% the previous year, and near the mid-point of the past five year’s pace. The planting pace for Mato Grosso is at 44% as of Friday, up from 42% the previous year. The target is to get the bulk of the crop planted by the last week of February, and they’re on pace to do so. The monsoon rains continue to fall across many of these areas, providing moisture for the crops, but not excessively so in a way that would create problems at this point.

Argentina’s production is expected to bounce back this year due to an improved weather pattern following several years of La Nina-induced drought. However, it faced an unanticipated period of hot dry weather in late January that stressed crops. Roughly 22% of the corn crop was planted early, with much of that in the sensitive pollination stage during the heat spell. Fortunately, the most intense heat was to the west of the primary growing areas. There were some pictures of dying soybeans posted on social media, tied to the hot dry spell. The Buenos Aires Grain Exchange estimates that 500K hectares (3%) of soybeans were in regular to poor condition due to the hot dry spell, while the Rosario Grain Exchange indicates that 100K hectares (0.5%) were lost. The rains are falling again, and temperatures have moderated, with expectations that soybean production will double this year, along with another large corn crop to offset possible losses in Brazil – at least there is little evidence to the contrary at this point.

A judge in Arizona vacated a decision by the Environmental Protection Agency allowing the use of dicamba herbicides on dicamba resistant cotton and soybean varieties this year. Farmers were planting these varieties due the buildup of weeds resistant to the active ingredient in Roundup herbicide. Farmers have already started planting cotton in the far south, with seed and chemical already purchased for much of this year’s crops. It’s yet unclear how the ruling will impact planting decisions for this year. Producer organizations are appealing to the EPA to at least allow consumption of existing supplies, but it’s still unclear what they’ll do.