Perspective: Morning Commentary for October 14

October 14 – This week is packed with expected third quarter earnings reports, along with key economic data that could impact market sentiment. As such, stock futures were mixed in overnight trade as traders brace for a plethora of data and reports to shape expectations going forward. The VIX is trading near 20 again this morning, reflecting a bit of apprehension on Wall Street, while the dollar index traded to fresh eight-week highs near 103.3 amid more disappointing stimulus news out of China, or a lack of news to impress traders anyway. Yields on 10-year Treasuries are trading near 4.07% this morning, as they pull back from Friday’s 10-week highs, while yields on 2-year Treasuries are trading near 3.94%. Crude oil prices are 2% lower after OPEC cut its global demand estimates again amid disappointing China results, while grain and oilseed prices were mostly lower overnight.

Chinese export growth slowed to just 2.4% year-on-year in September, falling short of market expectations of 6% growth, and a significantly slowdown from the 8.7% growth seen in August. This confirms that much of the strength in export growth over the summer was merely shippers pushing products out the door before tariffs imposed by key western customers went into effect. Furthermore, Chinese imports grew by just 0.3% year-on-year in September, down from market expectations of 0.9%, and down from the 0.5% growth seen in August. This suggests that China’s economy faces significant headwinds as the West continues to deleverage from sourcing goods in China, and it implies that China needs to step up its stimulus program in a significant way. The above data release was delayed until after today’s stock market close in China.

China’s Finance Ministry stated that the central government will raise its debt and fiscal deficit to facilitate sufficient stimulus for its economy, but it once again failed to give specifics that market participants wanted to hear. Chinese authorities appear to want both consumers and market participants to simply trust them, but they have yet to earn that trust, and both consumers and market participants are growing more skeptical by the day. The Finance Ministry indicated that the government would take bolder steps to bail out debt-strapped local governments and property sectors by issuing more bonds to help relieve their debt burdens. Special funds are also being set up to purchase existing homes on inventory to convert them into affordable government housing while removing some of the surplus housing on the market. Yet, the size of the bond issue may not be released for several weeks yet after it is approved by the National People’s Congress later this month. It’s estimated that the market has already priced in expectations that such bond issuance will be between 1 to 3 trillion yuan.

China’s consumer price index rose just 0.4% year-on-year in September, falling below market expectations of 0.6%, and falling below the 0.6% posted for August. Such low inflation levels are reflective of a stagnant economy. The CPI numbers were in the positive primarily due to food inflation pressures, with home appliance prices down 2% year-on-year, while vehicle prices were down 5.3%, suggesting that recent government stimulus programs in those areas have lacked effectiveness in triggering consumer buying. China’s producer price index fell 2.8% year-on-year in September, marking the 24^th consecutive month of deflation at the wholesale level, with deflationary pressures accelerating. That’s an indication of an economy that is in trouble.

Friday’s meeting between Russia’s Ag Ministry and exporters reportedly yielded an increase in the de-facto floor price that the government asked exporters to honor for free-on-board shipment to $250 per metric ton. FOB wheat had been trading in the $217 - $218 per ton range for many weeks, before spiking to $230 in the past week. This would appear to be one method to limit exports going forward due to tightening supplies within Russia, in an attempt to limit domestic food inflation pressures. This was largely unexpected by the market, although there’s still some uncertainty whether exporters will fully comply with the new floor price, based on mixed results in the past. Russia also raised its export tax by 41% last week, but that wasn’t enough to be a notable market factor. Combined, these steps do suggest that Russia is moving toward limiting exports, which has largely been behind the price strength of the past couple of months. That provides support, but additional gains necessitate more substance to the policies.

Brazil planted 11% of its soybean crop as of Friday, which is just barely above its sluggish pace posted in 2020. That year resulted in a good soybean crop, as the rains arrived in mid-October that year, similar to what happened this year as well. The late planting led to a late soybean harvest, and therefore late planting of the winter (safrinha) corn crop. That then resulted in 15% lower corn yields. We’ve seen good corn crops that were planted late as well, but the risks will be higher this year. The bottom line is that wheat has a story based in the Black Sea where it continues to be dry, soybeans lack a story, and corn “may” have a story six to nine months from now.