Perspective: Morning Commentary for April 22

April 22 – Stock futures pushed higher overnight to start the new week following last week’s big selloff in the tech sector. Middle East tensions are easing a bit this morning, although traders have their eyes on key PCE inflation data due to be released on Friday, following the release of first quarter GDP data on Thursday. The VIX continues to trade near 18 this morning, while the dollar index trades near 106.3. Yields on 10-year Treasuries are trading near 4.64% as we start the week, while yields on 2-year Treasuries are trading near 4.97%, as they flirt once again with the elusive 5% level. Crude oil prices are 1% lower in early trade, while the grain and oilseed sector is mixed to weaker, with the exception of wheat prices, which added modest gains.

The Chicago Fed national activity index is a composite of 85 existing economic indicators, constructed to equal zero when we have trend economic growth, with a standard deviation of one. The index rose to +0.15 for March, up from an upwardly revised +0.09 in February. Strength in the index was primarily from the production and employment sectors, while personal consumption and housing was mostly neutral and sales, orders and inventories was modestly negative. The bottom line though is that economic growth was a bit above trend levels in March.

Wall Street continues to hope for rate cuts this year to juice the economy. Yet, doing so before we are safely close to the 2% mandate level could jeopardize efforts to get there. Apollo Economics analysis shows that bringing the core CPI to 2% by the end of this year would necessitate a “sharp immediate slowdown in consumer spending and capex spending” the rest of the year, dropping month-on-month inflation to just 0.1% through the period. That would be unprecedented. The historical average for the rest of the year would be 0.2% month-on-month growth, which would result in the core CPI being around 3% at years end. On the other hand, if we see inflation continue to rise at the current pace for the remainder of the year, that would put core CPI in the 4 – 4.5% range.

The health of China’s economy is still heavily dependent on investment funds from the West, as is seen by the current economic slowdown as foreign direct investment from the west wanes due to deleveraging. FDI in China fell by more than 26% year-on-year in the first quarter, which shows an acceleration of deleveraging from the nearly 20% decline in the first two months. China is losing appeal to western investors, despite the many efforts of the Chinese government to create appearances of openness in recent months. This combines with a lack of consumer confidence that is a product of a sluggish property market to undermine economic growth in China. Its central bank would like to add stimulus to the Chinese economy, but doing so when the United States is hawkish in its monetary policy would undermine the value of its currency at a time when the Chinese government wants the yuan to be seen as a strong alternative to the U.S. dollar. Meanwhile, promises from the European Central Bank that it will soon start rate cuts adds weakness to the euro, pushing the dollar even higher on the global currency market.

Wheat prices added to Friday’s gains this morning as fund short covering supports the market amid increasing weather risks. Light frosts were expected in parts of France, Germany, and Poland, while persistent dryness remains a concern in the U.S. Central Plains and in southern Russia. World wheat stocks among the major exporters outside of the Black Sea Region and the United States are tight, so a potential risk to those supplies would leave fund managers at risk who are holding large short positions. A threat is just that at this point, but fund managers are easing up on their risk exposure once again. Previous rallies have been seen as opportunities to sell again in the past, but that will largely be determined by how these weather risks play out.

Leafhoppers continue to spread disease in Argentina’s corn crop, reducing its yield potential. Our boots on the ground there suggest that the crop could be down by 7 to 10 mmt as a result, although those are preliminary estimates. We still have much to learn about this relatively new problem. Dryness is also spreading in Brazil’s winter (safrinha) corn growing region, but that is partially offset by favorable planting conditions in the U.S. Midwest. A 2+ billion-bushel carryover on the U.S. balance sheet eases concerns for now as well, until / unless risks seen elsewhere escalate beyond current levels. Soybean supplies appear more than adequate out of South America currently, with U.S. planting looking good at this point as well. Geopolitical risks continue as well, although those currently impact corn and wheat more than soybeans at this point. The bottom line is that we still don’t have a bullish story, but we do have some stories making those leaning heavily bearish a little less comfortable this morning.