Perspective: Morning Commentary for February 9

February 9 – Stock futures are poised to add to this week’s record highs, as traders respond to solid earnings reports to go along with their expectations that the Federal Reserve will be lowering interest rates later this year. The VIX continues to trade below 13, reflecting a calm confidence on Wall Street, while the dollar index trades near 104.1. Yields on 10-year Treasuries are trading near 4.19%, which is just below eight-week highs, while yields on 2-year Treasuries are trading near 4.49%, which is at fresh eight-week highs. Modest headwinds were felt in the commodity sector overnight, although crude oil prices were able push modestly higher this morning on escalating Middle East tensions, along with expectations that a strengthening economy will increase demand in 2024. Meanwhile, the grain and oilseed sector traded mostly lower overnight, in follow through selling from yesterday’s USDA crop report.

Next week’s focus returns to inflation, but Wall Street anticipates that we’ll see the data support the current expectations of rate cuts later this year. The Cleveland Fed's nowcaster model predicts that the headline consumer price index will come in at 0.2% month-on-month growth for January on Tuesday, with year-on-year growth at just under 3%. The core CPI that excludes the more volatile food and energy sectors is expected to come in at 0.3% month-on-month growth, and 3.8% year-on-year growth. Those expectations have been priced into the market. But these are hotter numbers than modeled for the PCE inflation, which is what the Federal Reserve prefers. Those numbers show headline inflation on the low side of 0.2% month-on-month for January, and near 2.2% year-on-year, with core at 0.2% month-on-month and 2.7% year-on-year. Those numbers are still above the Fed’s 2% mandate, but the market has clearly shown its bias that it wants to see the proverbial glass as “half full.” In other words, it will see these numbers as being consistent with progress towards the target. A surprise to the upside would be the greatest threat at this point, but I haven’t expected that until we get into the second quarter.

China’s No. 1 Central Document for 2024 focusing on its objectives for agriculture was released this week. The document once again emphasizes food security and rural development, while strengthening the influence of the Communist Party in managing agricultural output. Specifically, it targeted expanding rapeseed production, improving crop yields, and raising the minimum state purchase prices for rice and for wheat. It calls for exploring subsidies tied to controlling input prices, with a specific mention of fertilizer prices, seeking how to stabilize input costs. The document calls for improving milk quality standards and labeling, along with mentioning the promotion of fresh milk consumption for the first time since 2007. Regarding soybeans, the document changed the focus from “expanding soybean cultivation vigorously” in last year’s paper to “consolidating the achievements of soybean expansion” in this year’s paper. It seeks to expand its full-cost insurance and planting income insurance policies for soybeans, while supporting the development of the full industrial chain processing of soybeans and other agricultural products in northeast China – an area of concentrated production. Of note, deletions from last year’s paper included “accelerating the industrialization pace of soybean bio-breeding” and “deep implementation of the action to reduce soybean meal in feed.” It previously had a policy in place to reduce soymeal inclusion in rations to 12.5% by next year, but this raises questions about its commitment to enforcing that objective.

Thursday’s USDA WASDE crop report was a quiet one, with two big exceptions dealing with the soybean balance sheet. USDA only cut the size of Brazil’s soybean crop by 1 million metric tons to 156 mmt. The trade expected it to come in at 153 mmt, while our StoneX Brazil’s customer survey pegged it at 150.35 mmt, and CONAB put it at 149.4 mmt earlier in the day. A larger-than-expected Brazil crop, coupled with expectations that Argentina’s crop will double this year, meant that USDA could wait no longer to cut U.S. soybean exports due to this year’s sluggish shipment pace, dropping it 35 million bushels, with those bushels then dropping to the bottom line of ending stocks. That pushed ending stocks to a comfortable 315 million bushels. I had warned that we would see a notable drop in exports of 25 – 50 million bushels in this report, with more cuts likely down the road, but I also expected USDA to acknowledge strong domestic demand by bumping its crush estimate to partially offset the export cut. It did not do so. I still see that coming down the road, along with a smaller Brazil crop, and that’s what the market seemed to assume as trading progressed through the day. As for corn and wheat, USDA simply failed to provide any reason for managed money to change their current mantra of “commodity deflation,” especially with Russia believed to be lowering its prices to keep grain moving through the Black Sea, although wheat prices are bouncing this morning.