Perspective: Morning Commentary for December 24

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 24 – It’s the day before Christmas, and all is quiet in the markets, with many traders hoping that it can stay that way until they return in the New Year. Yesterday definitely had a holiday feel to the markets, and today should have even more of that feel if we can avoid any big headlines that could amplify the move in the markets in the thinner trade volume. It’s a shortened trading day today, with the markets closed on Wednesday, reopening with continued thin volume on Thursday and Friday. Stock futures were mixed overnight in very quiet trade, lacking any significant drivers as we head into the holiday break, but with traders still waiting to see if we’ll get that “Santa Claus Rally” in the days between Christmas and the New Year. The VIX slipped below 17, reflecting a calmer festive spirit for the holidays, while the dollar index traded near 108.1 as it consolidated just below its recent two-year highs. Yields on 10-year Treasuries are trading at nearly seven-month highs this morning near 4.62%, while yields on 2-year Treasuries are trading near 4.35% as the yield curve continues to steepen. Crude oil prices are nearly 1% higher as they consolidate near the middle of their recent trading range, while the grain and oilseed markets are mixed to firmer in early trade.

China plans to issue a record 3 trillion yuan ($411 billion) in special treasury bonds in 2025 to stimulate its economy, according to a Reuters story hitting the markets overnight. That comes on top of the 1 trillion yuan of stimulus issued earlier this fall. The Chinese government is ramping up its debt load to strengthen its weak economy ahead of an anticipated trade war with the incoming Trump Administration. The program would target subsidies for increasing consumption of consumer goods as well as business investments in innovation-driven advanced sectors. The first issuance would be to raise 1.3 trillion yuan via long-term special issuance treasury bonds to fund two “major” and two “new” programs. One of the new initiatives would be to fund more subsidies for consumer purchases of durable goods. This would allow consumer to trade in old cars or appliances for new higher tech ones at a discount. The second would subsidize large scale equipment upgrades for businesses. The major programs mentioned above would include large projects such as constructions of railways, airports and farmland, while building security capacity in key areas. Sources told Reuters that 70% of this year’s 1 trillion-yuan bond program already went to the above four investment areas. Another big focus for the 2025 bonds would be to further invest in electric vehicles, robotics, semiconductors and green energy, with about 1 trillion yuan in bonds targeting that program. The rest would go towards recapitalizing large state-backed banks with faltering profits and bad loans. China’s stock market rallied today on hopes that the above programs provide evidence that authorities will finally do what is needed to support the Chinese economy, albeit at a great increase in government debt.

One of the big questions for 2025 will be whether the United States can start to trim its debt, even as China increases its obligations. The U.S. debt clock stands at nearly $36.3 trillion, which is where the debt ceiling will likely cap it on January 1^st until such time that Congress acts to change things. The general expectation is that the new Congress will either add to that limit, or it may suspend it once again when it meets next month, but it won’t happen without a fight, and the credit rating agencies will be watching the political drama. The annual cost of servicing that debt is up to $1.025 trillion, making it one of our largest budget lines currently. The past week’s rise in Treasury yields simply make servicing our debt even more expensive as maturing debt notes are rolled into new ones at higher interest rates. There will be many headlines about the risks of cutting essential services. But many Americans will have problems with the $15.5 billion spent by the Department of Energy to push Americans to buy electric vehicles that they otherwise wouldn’t buy, or the $12 million the Department of Interior spent on a pickleball complex in Las Vegas, or the $873,584 the State Department paid for movies in Jordon, or the $720,479 the Department of Interior spent on projects for duck habitats in Mexico. These are the types of projects that get added onto continuing resolutions that can top 1,500 pages to fund the government every few months, since Congress doesn’t do an annual budget anymore.

The grain and oilseed markets close early today. Trade volume is expected to be thin. Traders hope to be able to end the session without any market-moving news. Many remember the “cow that stole Christmas” in 2003, when a case of mad cow disease sent the markets into turmoil the day before Christmas, ruining the holiday for many. That’s the type of surprises that traders hope to avoid. Farmer sales tend to dry up ahead of the new tax year, and the recent passage of $10 billion in farm assistance will likely keep farmer sales quiet for a while, beyond what has largely already been priced for sale after the first of the year. Brazil weather remains quite favorable. Roughly a third of Argentina’s grain belt is under developing stress. It’s still early, but this will be an area to watch. The southwestern half of the U.S. Plains hard red winter wheat belt is dry as well, although that’s more of a story for March.

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Perspective: Morning Commentary for December 24

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