Perspective: Morning Commentary for October 2

October 2 – Stock futures again came under modest pressure overnight, as traders contemplate elevated geopolitical risks and a plethora of fresh jobs data emerging this week, along with statements from Federal Reserve Chairman Jerome Powell that suggest that he’s a bit more hawkish than the market had been anticipating. The VIX Is trading near 20 this morning, while the dollar index is trading near 101.5. Yields on 10-year Treasuries rebounded to trade near 3.80% after this morning’s jobs data was released, while yields on 2-year Treasuries are trading near 3.65%. Crude oil prices are nearly 3% higher again today as Israel and the United States vow retribution on Iran following its direct attack on Israel yesterday. The grain and oilseed markets are mixed, with corn and wheat prices moving higher, while soybean and soymeal prices drop on a published story about a possible delay in the EU’s deforestation law that could have implications for demand for U.S. soybeans and products.

Iran fired more than 180 ballistic missiles at Israel on Tuesday evening. Iran now declares that the action is over, but Israel has promised that Iran will pay for the attack, while the United States has made similar threats. Iran responded by stating that any retaliation would be met with “vast destruction,” raising the risks that we could see a much larger escalation in the Middle East conflict. Drawing Iran into the year long conflict in the Middle East also then draws the United States into the conflict. The market fears that retaliation against Iran could involve Iran’s oil infrastructure, which provides much of its revenue for funding its proxy wars on Israel. Traders also fear that a strike on Iran’s oil infrastructure might then lead Iran to attack Saudi Arabia’s oil infrastructure, as it did in 2019, or the conflict could also result in the closure of the Strait of Hormuz. Iran’s August oil output was a six-year high 3.7 million barrels per day, accounting for nearly 4% of global oil output, but a spread of the conflict to other regional producers could cause the impact to expand more significantly. However, OPEC+ has additional output that it can utilize to replace the Iranian oil as long as the conflict does not spread to other countries. OPEC+ is currently reducing output by 5.86 million barrels per day to support prices, so some of that could be brought back online if needed and/or desired. The U.N. Security Council called a meeting for today, but there’s little optimism that the meeting will have much of an impact.

Today’s ADP employment report indicated that the private sector created 143K jobs in September, exceeding analyst expectations of 121.5K. Furthermore, the August data was revised to 103K jobs created, up from the 99K originally reported last month. The correlation between the private sector ADP report and the government’s monthly jobs report has been weak, but today’s numbers raise the possibility that we could see a good jobs report on Friday. Traders have currently priced in expectations that Friday’s report will show 132.5K jobs created in September, down from 142K the previous month, but today’s data suggests that the numbers might come in higher than that. Ironically, there’s a wide range of expectations for Friday’s report, with numbers ranging from 70K to 180K, but with the unemployment rate remaining between 4.2 and 4.3%. Keep in mind that Friday’s jobs report will not include any data related to the longshoreman’s strike that started at ports yesterday. Most reports have largely ignored the impact of that strike on downstream businesses that heavily depend on container shipments.

The European Commission is expected to propose a delay in its landmark legislation previously designed to reduce global deforestation. The European Union is getting massive backlash for the legislation that is currently scheduled to take effect on December 30^th. Bloomberg reported this morning that no decision has been made yet, but a proposal is apparently on the table to delay implementation by one year. Global Ag exporters from Brazil to Indonesia have been fiercely critical of the legislation that they say will unfairly penalize small farmers. However, some EU members have also expressed concerns that the legislation could result in commodity shortages and an escalation of inflation. Some recent strength in the soybean complex futures had been attributed to expectations that implementation of the law might increase demand for U.S. soybeans and products, but prices dropped this morning on thoughts that a delay of implementation would leave U.S. supplies more than ample following this year’s harvest.

StoneX’s customer survey pegged the U.S. corn crop at 184.0 bushels per acre on Tuesday afternoon, up from 182.9 bpa the previous month, and above USDA’s September estimate of 183.6 bpa. The survey pegged the soybean crop at 53.5 bpa, up from 53.0 bpa the previous month and up from USDA’s September estimate of 53.2 bpa. The numbers will again confirm to the market that it is close to having the size of this year’s crops priced in, although the sheer size of them will likely create storage problems as we move through the harvest in the next several weeks. Meanwhile, rains that have been showing up in the longer-range forecasts for Center-West Brazil continue to pull forward into the 6- to 10-day period, raising hopes that Brazil will produce a 165+ mmt bean crop.