Perspective: Morning Commentary for July 24

July 24 – Stock futures sagged overnight on disappointing earnings from Tesla and Alphabet, as traders brace for key economic data to be released the next two days. The VIX rallied again to trade just below 16 overnight, while the dollar index is trading near 104.2. Yields on 10-year Treasuries are trading near 4.22%, while yields on 2-year Treasuries fell to fresh five-month lows below 4.40% as the yield inversion narrows significantly overnight. Crude oil prices consolidated higher overnight following yesterday’s big selloff, while the grain and oilseed sector was mostly weaker overnight.

Two-year Treasury yields fell following disappointing housing data released yesterday, along with solid auction demand. The decline in yields also reflects strong expectations for a Federal Reserve rate cut in September, with Fed fund futures now essentially trading 100% odds that it will happen, while also pricing in expectations of up to three rate cuts by the end of the year. However, the longer end of the yield curve has been slower to come down, reflecting some sticky inflation expectations, along with rising federal budget deficits. Yesterday’s existing home sales numbers were disappointing, but home prices hit new record highs due to the lingering shortage of homes on the market. Yes, the inventory of homes is currently slowly rising, but demand tends to surge every time that we get a combination of lower rates and increased consumer confidence.

Furthermore, our national debt is now on the cusp of $35 trillion, with the annual cost of servicing that debt now over $900 billion – roughly just $9 billion below what we annually spend on national defense and various war efforts around the world. That’s not sustainable. The debt ceiling is currently suspended until January 1 of next year, and the limit increases to accommodate paying whatever obligations were incurred prior to that date. As such, the debt limit is currently $35 trillion and slowly rising as needed until January 1^st. That means that the Treasury Department will face decisions on which debts to pay with the available funds after January 1 until Congress acts to either extend the suspension, increase the debt ceiling, or to cut spending. That decision will need to be made by a lame-duck Congress, and what now appears to be a lame-duck president following President Biden’s withdrawal from the presidential race, or we could see the decision delayed until the new Congress and Administration takes office in January, requiring some creative accounting by the Treasury Department. Regardless, we risk seeing another credit downgrade that results in higher interest rates. Politicians will likely continue to kick the proverbial can down the road until they no longer can do so. At that point, it will require some combination of much higher taxes, significant spending cuts, and likely quantitative easing by the Federal Reserve (monetizing the debt) to get us out of the mess. That’s negative for economic growth and inflationary by nature.

China’s stock market remained under pressure today due to a lack of confidence in government efforts thus far to turn the economy around. An unexpected 10 basis point rate cut by the People’s Bank of China did little to restore confidence, and neither did the statement released by authorities following the conclusion of the Third Plenum conference that was more about economic theory than it was practical steps for a recovery. China’s Vice-Premier met with a group of U.S. business executives following the conclusion of the Third Plenum meeting to reassure them that they can expect normal business operations in China, hoping that these business leaders would apply political pressure back here in the States to ease economic pressure on China. But the move is not expected to make much difference, since a tough stance on China currently polls well in the United States. China needs to see 5% GDP growth to keep things functioning properly in its economy, and that looks like a difficult target to hit currently.

Russia was the world’s largest seaborne exporter of diesel fuel last year, despite a short ban on exports late in the year. Yet, it is reportedly considering a ban on diesel exports due to rapidly rising domestic prices. We’re seeing reports that diesel prices on the European side of the country are up by roughly 20%, reflecting tighter supplies – something that creates challenges for agriculture, and perhaps for the war effort as well. Russia also currently has a ban on gasoline exports, although those are traditionally relatively small. Why the high prices and the ban? Russia remains quiet about the impact of numerous attacks on its refinery capacity by Ukraine drones and missiles, but it is possible that Ukraine is having a significant impact. Ukraine obviously wants to reduce the fuel supply for Russian troops, but a supply shortfall can also impact supplies available for production agriculture as well. Credible information coming out of Russia is difficult to find, but we can monitor some cash markets for signs of tightening supplies. This is something to watch as we get into the fall harvest season. Meanwhile, here in the Midwest, we should see showers cut areas under moisture stress in half to 20% of the area over the next 10 days, down from 40% currently, but with heat increasingly building over the area as we turn the calendar to August.