Perspective: Morning Commentary for December 9

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 9 – Stock futures were mixed to weaker overnight, as traders again assess last week’s jobs data ahead of this week’s inflation data, that all set the stage for next week’s meeting of the Federal Open Market Committee to shape monetary policy. The VIX is trading below 14 this morning, while the dollar index is trading near 105.9. Yields on 10-year Treasuries are trading near 4.18%, after falling to seven-week lows on Friday, while yields on 2-year are trading near 4.12%. Crude oil prices again bounced off support near $67 overnight, and they are now trading more than 1% higher on value buying. The grain and oilseed complex was modestly higher as well.

Syria has fallen. Syria’s leadership fell to rebel forces over the weekend, with Russian military forces currently encircled as they wait to learn their future. The fall of Syria dramatically weakens Iran’s ability to operate in the region. In fact, rebel forces were able to overthrow the Assad Regime largely because of Israel’s attacks on Hezbollah in Lebanon and Syria in recent days and weeks. A power vacuum currently exists within Syria, which can be a dangerous thing. Various factions with likely support from outside forces will be trying to position themselves to fill that vacuum in the coming days. None of this has much direct impact on the commodity markets, but it does have an impact on the future dynamics of the Middle East, and that does have an impact on the commodity markets – particularly the energy and fertilizer markets.

President-Elect Donald Trump continues to announce nominees to various positions in his Administration, but the main players are largely known now, pending their confirmation by the Senate. Expect the Trump Administration to operate very quickly in implementing their agenda, recognizing the fact that they could very easily lose Congress in the mid-term elections. That gives the Administration two years to get their agenda enacted, and two years is a very short time slot in the world of Washington politics. First priority will likely be closing the borders, which Trump has already acted on with his tariff threats against Canada, Mexico and China. Another quick priority will be extension of tax cuts passed in 2017, that are scheduled to expire at the end of next year. The federal spending cap will be hit on January 1, making quick work on it an essential component as well. The Department of Government Efficiency has a goal of cutting spending by 30%. Cutting it by 5% would be challenge enough, so its leaders are already meeting with Congressional leaders to see what they can do to hit the ground running. A new farm bill must be passed in short order in the above atmosphere, with the future of the liquid biofuel program also hanging in the balance. That’s a lot of moving pieces in a relatively tight window of time that could have a significant impact on the demand for major agricultural commodities for years to come – either positive or negative.

China’s November consumer price index rose just 0.2% year-on-year, down from 0.3% gains in October, and down from market expectations of 0.5%. Month-on-month inflation actually fell 0.6% in November, reflecting the weakest conditions since April, with seven out of eight price categories experiencing deflationary pressures. The one exception was clothing prices, which rose 0.6% on the month. Core CPI, which excludes the food and energy sectors, fell 0.1% on the month, while being up 0.3% year-on-year. However, that number too reflects lost upward momentum. In this case, some inflation would be a sign of economic strength, so deflation is seen as a negative indicator of economic health. The producer price index, reflecting price movement at the wholesale level, fell for the 26^th month in a row, down 2.5% year-on-year in November, although that showed improvement from the -2.9% posted in October. The PPI posted a 0.1% month-on-month gain for the first time since June. Yet, more than 60% of the 30 industry categories saw prices decline or stall in November. On a related note, we continue to see a surge in house sales due to recent stimulus programs, with existing home sales in 20 Chinese cities up over 24% on the week and up by more than 102% year-on-year from very low levels last year. However, commercial apartment inventory remains at historically high levels, indicating that the property sector continues to face major challenges.

China produced a big corn crop this past year, but stories of quality problems are emerging as the corn is being pulled out of storage. Many anecdotal stories of quality problems have the domestic cash market concerned, with buyers rushing to bid for imported corn being auctioned off from China’s reserves. It’s yet to be seen whether this will develop into a resurgence of corn imports, but it is certainly something to be watched going forward. Corn, soybeans, soymeal, soyoil, wheat, and even crude oil prices, are all near areas of chart support that are currently generating some value buying interest. Farmer selling is typically slow in December, so that also removes some of the selling interest that otherwise see. We find ourselves in the holiday doldrums period when the markets tend to drift. That doesn’t remove the downside risk for the cash markets, but it does open the door for those cash markets to firm a bit.

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Perspective: Morning Commentary for December 9

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