Perspective: Morning Commentary for November 22

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

November 22 – Stock futures were mixed to lower overnight, as traders prepare to head into the weekend contemplating incoming President Trump’s cabinet selections, a rapidly changing geopolitical situation, and struggling economies in China and Europe. The VIX is trading near 16 this morning, while the dollar index is trading near 107.5, after hitting a fresh two-year high near 108.1 overnight. Yields on 10-year Treasuries are trading near 4.41%, while yields on 2-year Treasuries are trading near 4.34%. Crude oil prices are modestly higher this morning, while the grain and oilseed prices bounced modestly from yesterday’s losses, despite the strong dollar.

China’s Shanghai Composite index fell by 3.06% today, while the Shenzhen Component plummeted by 3.52%, hitting fresh three-week lows on mounting concerns about China’s economy. State-backed institutional funds tried to initially prop up the market, but then they seemed to yield to the inevitable, as other sectors of investors sold. The selling was largely driven by renewed concerns over China’s poor economic performance as investors question the effectiveness of China’s stimulus measures in driving economic growth. Additionally, investors fear that Trump tariffs will hit China’s economy at a point where it is already vulnerable. Most commodities were under pressure as well on fears that a declining economy would result in weaker demand, although gold and energy prices were able to post gains during the session.

There’s been a great deal of speculation about the potential impact of President Trump’s promised tariffs. The assumption is that another round of U.S. tariffs will prompt counter-tariffs from some of our biggest trading partners, namely China and Europe, as well as Mexico, raising prices for everyone. That’s an easy argument to make, and it may prove to be true. But there is another scenario to consider. This isn’t the first round for these government leaders. This will be Trump’s second round of serving as a president using tariffs as a part of his policy. But it’s also the second time around for the leaders of most of the other countries involved as well. They know what to expect from Trump. As such, they’re likely to take a different strategy this time around. Furthermore, they’re generally in a weaker position for battling the United States in a trade war. China’s economy is dynamically weaker now than it was eight years ago, leaving Xi in a much weaker position to fight U.S. tariffs. Europe’s economy is in a more vulnerable position as well, as the war in neighboring Ukraine continues to take its toll. This might put these leaders into a position of trying to negotiate a pre-emptive trade agreement to avoid the tariffs. We already hear talk within China of this being a possibility – that perhaps an agreement would be reached to purchase more U.S. corn and soybeans to ease tariffs on consumer goods headed this way. The United States is the most power consumer buyer in the world. China cannot afford to lose our business, and to some extent, neither can Europe or Mexico.

Europe’s November purchasing managers index provided a wakeup call for policymakers in the economic bloc. Business is softening for both manufacturing and the service sector. As such, the service sector contracted this month, while the manufacturing sector fell deeper into recession. Europe’s central bank has already cut its benchmark interest rate three times to 3.25% this year. The market is now expecting another 25-basis-point cut next month, with a further 125 basis points to come off next year, taking it to 1.75% by the end of next year. Both France and Germany saw their economies decline at an accelerating pace this month, with political uncertainty in these two largest economies partly to blame. Europe can ill-afford new Trump tariffs. As such, the euro tumbled to values closer to par with the dollar overnight, sending the dollar index to fresh two-year highs.

U.S. government employees are actively lobbying Congress to save their jobs. Their concerns is the newly formed Department of Government Efficiency to be headed by Elon Musk and Vivek Ramaswamy. They have promised to cut government spending by 30%. That seems admirable, considering that the cost of servicing our debt is now over $1 trillion per year. Currently, the cost of a) Social Security, b) Medicare/Medicaid, c) Defense, and d) interest costs on our debt totals nearly $5.3 trillion, versus projected tax receipts of just over $5.0 trillion. You would essentially need to wipe out all other areas of discretionary spending to reach the 30% cuts. That’s not likely to happen. Perhaps the 30% is a position set to start the negotiations, but real cuts are obviously the target. Another reality is that the party in the White House typically loses Congressional seats in the mid-term election, so Trump knows that he has two years to hit his primary objectives. That’s an extremely short time in the world of politics. This isn’t his first rodeo. He’s aware of that. As such, he’ll need to make his appeal to the American public very quickly – likely in the first 100 days in office – if he’s going to develop any momentum toward cuts. The credit rating agencies will be watching these developments quite closely. Any further political gridlock to avoid dealing with our fiscal spending problem could result in unexpected credit rating downgrades, pushing interest rates higher.

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Perspective: Morning Commentary for November 22

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