Perspective: Morning Commentary for December 23

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 23 – It’s a holiday-shortened week for the markets, followed by another holiday-shortened week next week. The markets will be open for a short day tomorrow, and then closed on Wednesday for the Christmas holiday, before reopening on Thursday. Many trading houses will be operating with reduced staff, with trade volume expected to be thin. Market action tends to be erratic, but the thin volume can also facilitate significant moves if a headline emerges to drive the market. Stock futures were mixed overnight, with the VIX hovering below 19 for much of the session thus far. The dollar index is trading near 108.2 as it follows Treasury yields higher once again. Yields on 10-year Treasuries are trading near 4.55%, while yields on 2-year Treasuries are trading near 4.33%. Crude oil prices are modestly weaker this morning, while the grain and oilseed markets were mostly higher heading into Christmas week.

Congress came through in the 11^th hour once again to keep the government funded. The Senate passed a bill early Saturday morning that had previously passed the House hours earlier that funds the government through March 14^th. It was a relatively clean bill that funds the government at current levels, except it includes $100 billion – including emergency farm aid – in disaster relief aid and a one-year extension of the farm bill. This means that money will be flowing to farmers, and therefore into the Ag industry that farmers support. It also means that farmers have reduced incentives to sell cash grain after the government checks arrive. The new Congress will have to work with the Trump Administration to come up with a new funding plan in his first 100-days in office, while also dealing with the debt ceiling problem. The debt ceiling gets locked into whatever level the debt is at on January 1^st, requiring creative bookkeeping to continue to pay bills until the new Congress deals with the issue. The credit rating agencies will be monitoring how Congress handles this very closely.

The Chicago Fed national activity index is a weighted average of 85 existing monthly indicators of national economic activity created to equal zero when the economy is growing at a trend rate, with a standard deviation of one. The index came in at -0.12 for November, which is an improvement from the downwardly revised -0.50 posted for October. The three-month moving average slips to -0.31, down slightly from -0.27 previously. In other words, the economy grew at slightly below trend levels in November, but that was an improvement from October.

China’s housing market continues to see improvement in sales as a result of recent stimulus efforts, but it has a long way to go before authorities can declare victory. The housing industry agency CREIS reports that sold areas of new building projects in 30 Chinese cities were up another 12.7% week-on-week and they were up 58.1% year-on-year. Sales of existing homes were up 107% year-on-year. Yet, the excess inventory of unsold homes in 10 representative cities fell by just 0.3%. The data suggests that in the broader country, the inventory of unsold properties actually increased slightly in November from the previous month. Keep in mind that when you see a big percentage increase in property sales year-on-year, it’s generally from an extremely small number a year ago. The inventory of unsold properties remains high in an economy where the population is in decline, indicating lower overall demand for housing. This continues to create significant challenges for authorities.

Spot soymeal futures posted fresh six-week highs overnight, before giving way to profit taking this morning as crush spreads were unwound that supported soyoil, while sentiment remains weak in soybeans. It’s well known that growing conditions have been nearly ideal in Brazil after a late start due to a sluggish start to the rainy season this year that delayed early planting. Typically we would see some early fields harvested in the coming week to 10 days, but that will likely be moved back to the first week of January, with meaningful harvest volumes not likely for another month or more. But continuation of the current weather pattern is expected to favor a record harvest, with the year-on-year increase in volume approaching what the United States will ship to China this year. Meanwhile, the weekend agreement to fund the government contained no language to provide clarity on future subsidy support for the liquid biofuel program, which means that we could see a significant deterioration in soybean crush margins over the next few weeks, tightening up soymeal supplies to the level where they will support crush again.

The bottom line is that soybean fundamentals need a trade deal with China to salvage them. That is one of the possibilities that lies before us, although it likely would take some time to occur. They also need solid government guidance on support for soyoil for green diesel production. That too could take some months to develop. Meanwhile, the U.S. prevailed in its dispute with Mexico over the import of GMO corn that threatened U.S. exports. This should support sustained strong corn exports into Mexico over the coming year.

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Perspective: Morning Commentary for December 23

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