Perspective: Morning Commentary for September 25

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

September 25 – Yesterday’s optimism translated into today’s caution in overnight trade, with stock futures and commodities both seeing more red on the screen than green in early trade, even as Tropical Storm Helene approaches hurricane strength in the Gulf of Mexico. The VIX is trading near 16 again this morning, while the dollar index is trading near 100.3 as it consolidates just above 14-month lows. Yields on 10-year Treasuries are trading near 3.76% as they trend higher following the Federal Reserve’s rate cut last week, while yields on 2-year Treasuries are trading near 3.53% after setting fresh two-year lows overnight. Crude oil prices are trading 1% lower today amid the general negativity in the commodity sector and as Helene’s projected path takes her east of the major oil producing areas of the Gulf, while the grain and oilseed sector is mostly in the red as well.

China’s stock market gapped higher today as traders continue to price in expectations of better days ahead following yesterday’s big stimulus program announced by Chinese leaders. The yuan tested the 7.0 to the dollar level as it continues to strengthen, while commodity prices pushed higher on expectations for greater demand. Iron ore led the way higher in the Chinese markets, trading 6% higher on the day. But the primary target of China’s new package appears to be the recently stagnant stock market, which is considered crucial for stabilizing market and consumer confidence. Specifically, the People’s Bank of China set up a special fund that was only allowed to be used by financial institutions to support the equity market. Meanwhile, the 50-basis point rate cut for mortgages is expected to reduce mortgage payments by 5 to 6%, putting more money into the pockets of homeowners that can be spent on durable goods and services. Analysts believe that China will add additional stimulus if we see the Fed cut another 75 basis points from U.S. rates by the end of the year. As such, hopes for an immediate rebound in the property market in China remain low, with the market waiting for those additional steps. The inventory of unsold property remains high in a country with an aging and declining population.

Three dozen U.S. ports could be impacted by a longshoremen’s strike next Tuesday if an agreement is reached prior to that time, unless the government steps in to intervene. This is something that the Biden Administration did not want to see happen just ahead of the U.S. presidential election. President Biden can call for a 60-day cooling off period, but he risks angering the union vote ahead of the election if he does so. However, not intervening could hit the economy hard right ahead of the election. In the end, the assumption is that he will call for a cooling off period soon after the strike starts. The current contract for these longshoremen expires on September 30^th. The contract covers all ports from Main to Texas that receive roughly 41% of the nation’s containerized port volume. A coalition of 177 trade groups warned the president last week that a strike could have a “devastating impact” on the U.S. economy. A strike would be expected to impact containerized agricultural exports, including containerized soybeans, soymeal, DDGS, chilled or frozen meat, eggs, and other livestock products. But the impact is currently expected to be minimal for bulk commodity movement. Even so, a blow to meat exports that hurts the livestock industry will then indirectly impact domestic corn and soymeal consumption. Regardless, we can assume that costs will go up. We don’t know what the final agreement will read, but the union is seeking a 77% pay increase over six years, while also fighting moves toward more automation that shippers are seeking to cut costs. That translates into higher freight rates for what we export, as well as import in the months and years ahead.

Tropical Storm Helene is currently making its way past the Yucatan Peninsula into the Gulf of Mexico, where the warm waters of the Gulf are expected to support “explosive rapid intensification” as we go through the day today. The storm is expected to make landfall south of Tallahassee, Florida late tomorrow as a Category 3 or stronger hurricane. This is expected to be a very large storm with significant storm surge, wind and rainfall impacts that extend well away from the center of the storm, and beyond the forecast cone – especially on the east side of the storm. The storm surge in Tampa Bay could reach 8 feet, with higher surges possible just to the right of the expected area of landfall. Rainfall totals of 8 to 12” are expected as the storm moves north into the mountainous terrain regions of Georgia, South Carolina and North Carolina, while North Carolina may see more than a foot of rainfall, causing significant flooding. The remnants of the storm are expected to get absorbed by an area of low pressure dropping down into the Midwest that will pull the moisture north and west into much of the Ohio River Valley where it has been quite dry of late. That will disrupt corn and soybean harvest, but only temporarily. The biggest crop at risk of loss will be the Southeast cotton crop, that is largely in the vulnerable open boll stage. Just four energy platforms reportedly evacuated to this point ahead of Helen’s movement into the Gulf, while two other dynamic platforms were moved out of the path. This accounts for just over 1% of Gulf production, resulting in minimal impact on energy supplies.

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