Perspective: Morning Commentary for April 1

April 1 – Stock futures traded solidly higher overnight, following what Wall Street considered to be better-than-expected PCE inflation data on Friday when the markets were closed. However, that strength began to wane this morning, leading to a softer tone to start the week and to start the new fiscal quarter. The VIX is trading higher near 14 this morning, while the dollar index is firming to trade near 104.6. Yields on 10-year Treasuries bounced off chart support this morning, rallying to trade near 4.26%, while yields on 2-year Treasuries are trading near 4.63%. Crude oil prices are modestly higher in early trade, while the grain and oilseed markets are mixed to weaker.

The headline personal consumption expenditures (PCE) price index rose 0.3% month-on-month in February, which was better than the 0.4% growth anticipated by analysts. However, the January number was revised up to 0.4% from the 0.3% growth originally reported. The PCE inflation index rose 2.5% year-on-year in February, up from 2.4% in January, but matching analyst expectations. The core PCE index that excludes the more volatile food and energy sectors rose 0.3% month-on-month in February, following an upwardly revised 0.5% for January. Core PCE inflation was up 2.8% in year-on-year in February, down from 2.9% in January. Federal Reserve Chair Jerome Powell commented that Friday’s PCE numbers were in line with what the central bank would expect for inflation as it makes its way down to the 2% mandate level. Many analysts interpreted that as being further supportive of several rate cuts this year. Fed fund futures now put nearly 65% odds on a June rate cut.

That’s good news for Chinese officials, who would like to see U.S. rate cuts to give them greater freedom to stimulate their economy without further weakening the yuan. Yet, they received good news today when a private survey revealed that manufacturing activity in China expanded at its fastest pace in 13 months in March. Despite this news, it’s interesting to note that gold is a hot commodity in China – both for its government and for private investors. China’s central bank reportedly purchased 225 metric tons of gold in 2023, marking its most significant acquisition since 1977. Other state-linked investors were buyers as well, although these purchases are typically not revealed. China imported 367 metric tons of gold for non-monetary use in just January and February of this year, up 51% year-on-year. Investors see gold as an attractive alternative amid weakness in the property sector and other lingering uncertainties in the Chinese economy, including a weak currency.

USDA surprised the commodity world on Thursday with the results of its March Planting Intentions survey that revealed that farmers intend to plan 6.3 million fewer acres to the principal crops this year versus last year. A year-to-year reduction of that size is nearly unheard of unless driven by adverse weather, such as drought or extreme flooding – neither of which exist currently. Margins are certainly compressed for farmers, but I still see no evidence that farmers plan to leave ground unplanted this year – certainly not to the extent insinuated by the numbers. I fully expect these numbers to change by the June survey, but that doesn’t mean that I’m going to ignore them. It doesn’t pay to ignore USDA numbers that we can expect to be the baseline for trading over the next several months, and so I will go with them as well, and then take another look at them when USDA again surveys in June. The primary question at that point will hinge around where to allocate the acres that return, if in fact they do return? That allocation can be expected to be impacted by planting season weather over the next 60 days. Favorable weather tends to increase corn acres in the heart of the Midwest, at the expense of soybeans, for example.

USDA’s quarterly stocks numbers on Thursday were essentially neutral. USDA may have over-stated the corn crop size a bit in January, and under-stated the size of the soybean crop, but the differences from expectations were also within the margin for survey error as well. As such, we may not see much adjustment to its balance sheet as a result of Thursday’s stocks numbers when USDA releases its monthly WASDE crop report on April 11. The acreage numbers though will impact USDA’s 2024-’25 balance sheets that it will first release with the May WASDE reports. I wouldn’t call any of the numbers bullish, as they still provide adequate acreage to produce what we need to fill anticipated demand if the weather cooperates. However, the corn, wheat and cotton numbers reduce the margin for error if we would encounter adverse weather in the growing season ahead, especially if that is also the case in a major producing area overseas. In fact, the soybean balance sheet remains vulnerable to adverse weather as well. Keep in mind that the farmer is still undersold here in the States, but especially so in Brazil. That will likely limit the ability of this market to sustain rallies until / unless the fundamental story changes. Roughly a quarter of Brazil’s winter (safrinha) corn crop is encountering various levels of moisture stress currently, while the potential remains for that to spread to up to half the crop during the month. Meanwhile, a series of weather systems crossing the U.S. Midwest are expected to continue to erode away areas of dry soils ahead of spring planting here.