Perspective: Morning Commentary for January 16

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

January 16 – Stock were mixed this morning, as traders digest strong bank earnings, versus mixed retail sales and weekly jobless numbers. The VIX is trading near 16 at this hour, reflecting easing concerns overall on Wall Street, while the dollar index pulled back from overnight gains on this morning’s data release to trade near 109.3. Yields on 10-year Treasuries are trading near 4.67%, while yields on 2-year Treasuries are trading near 4.30%, with both bulling back modestly on the data release. Crude oil prices consolidated lower from yesterday’s nearly half-year highs, while the grain and oilseed sector came under selling pressure overnight.

Retail sales rose 0.4% month-on-month in December, below expectations of 0.5% growth. This came after November sales growth was revised to 0.8% growth, up from the 0.7% originally reported. Retail sales minus vehicle sales also rose 0.4% on the month, matching analyst expectations, and up from the 0.2% pace seen in November. Retail sales minus vehicles and gas rose 0.3% on the month, down from expectations of 0.4% growth, but still up from the 0.2% growth seen in November. Overall, these are solid numbers, although perhaps not as solid as hoped once the impact of rising gas prices were factored into the data. Even so, the latter still showed modest growth from the previous month. Other data showed that import prices paid in December rose by 0.1% on the month and 2.2% on the year – the latter of which was up from 1.3% inflation the previous month. Export prices were up 0.3% on the month and up 1.8% on the year – both showing increases from the previous month as well.

First-time claims for unemployment benefits rose to 217K in the week ending January 11, up from a very low 203K the previous week, and above analyst expectations of 217K. The four-week moving average was down slightly at 212.75K claims, down from 213.5K the previous week. But continuing claims fell by 18K in the week ending January 4 to 1.859 million. The four-week moving average for continuing claims slipped by 1,250 to 1.867 million. Overall, these numbers have continued to show low levels of fresh weekly claims, but a sustained and elevated level of continuing claims that may still be related to hurricane damage in the Southeast that destroyed jobs, or it may be reflective of other underlying factors in the job market not currently obvious.

Donald Trump will be sworn in as president on Monday. There will be a lot of pomp and circumstance surrounding the swearing in ceremony, as there always is at this event. But traders will be most interested in what happens after the ceremony, when the president will enter the White House to sign a stack of executive orders. Nobody knows how many executive orders will be signed, although some reports have suggested that it may reach as many as 100. In all likelihood it will be fewer than that, but there will likely be more in the days that follow. Of most interest will be the executive orders that may impact tariffs applied to various products and countries. What will be the size of those tariffs? Will they be phased in or hit all at once? Which countries and products will be impacted? What will be the responses of the countries impacted? Will we see quick resolution via trade agreements with some of those countries – such as Canada and Mexico – or will it lead to escalation of trade conflicts. The markets will be closed for the Martin Luther King, Jr. holiday on Monday, so the markets won’t be able to trade these factors until they open that evening. That could lead to a volatile night of trade that could carry into Tuesday’s day session.

USDA released 45Z feedstock details on Thursday, providing a degree of clarity for the liquid biofuel industry, and for those who produce the potential feedstocks for the fuel production. The interim rule outlines how farming practices that reduce greenhouse gas emissions or sequester carbon will score out on a county-by-county basis. They provide credits for individual practices applied by farmers that can provide carbon benefits for the feedstocks that they produce that in theory make it easier for biofuel facilities to qualify for the 45Z credit for producing renewable diesel and/or sustainable aviation fuel. The suggested practices include reduced tillage and various fertilizer application practices, among others. Farmers can utilize a carbon intensity calculator created by USDA to calculate their expected carbon intensity score that USDA says could add up to $1 or more per bushel to the value of crops they produce as feedstocks for liquid biofuel production. It’s good to get clarity that the industry should have had months ago. The required 60-day comment period now means that the Trump Administration has the flexibility to go with these guidelines, alter them, or to throw them out altogether. The industry still lacks clarity on where the Trump Administration stands on this. Second, if implemented, the above adds another layer of bureaucracy to the process, and bureaucracy always adds costs. One thing we know is that milo now also falls under these standards, and that imported used cooking oil qualifies for credits in the production of used cooking oil, but not for the production of renewable diesel. Regardless, we have not seen anything yet that suggests that there will be a positive financial return for processors to produce the biofuels above their mandated levels.

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Perspective: Morning Commentary for January 16

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