Perspective: Morning Commentary for February 7

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

February 7 – It was a relatively quiet night ahead of this morning’s monthly jobs report, which was a pretty solid report. Stock futures traded both sides of unchanged in the moments following the report as the Algos reacted to the numbers, but they generally firmed coming out of the data release. The VIX is trading near 15 this morning, while the dollar index is trading near 107.8. Treasury yields rallied following this morning’s jobs report, which showed signs of a healthy job market with rising wages. Yields on 10-year Treasuries are trading near 4.50% again, while yields on 2-year Treasuries are trading near 4.27%. Crude oil prices are modestly higher, while the grain and oilseed markets were modestly lower overnight.

The economy created 143K jobs in January, falling short of analyst expectations of 168K jobs created. However, the previous month’s total was revised to 307K jobs created, up from the solid 256K originally reported. That’s a net positive overall. Private payrolls rose by 111K in January, down from expectations of 140K, but the previous month’s total was revised to 273K, up 50K from what was originally reported. The unemployment rate slipped lower to 4.0% in December, down from 4.1% the previous month, and down from analyst expectations of 4.1%. The labor force participation rate ticked up to 62.6% in January. There continues to be 5.5 million people who indicate that they would like to have a job, but they haven’t looked for a job in more than four weeks, or they were “unavailable” to work if offered a job. Healthcare added 44K jobs in January, while retail added 34K, social assistance added 22K, while government added 32K workers.

The average hourly earnings rose 0.5% on the month in January, beating expectations of a modest 0.3%, and up from the 0.3% seen the previous month. Average hourly earnings rose 3.9% year-on-year in January, up from expectations of 3.8%, but below an upwardly revised 4.0% for the previous month. The average workweek slipped to 34.1 hours, falling from expectations of 34.3 hours, whereas the previous month’s number was revised a tick lower to 34.2 hours. Today’s jobs report shows a solid employment picture reflective of an economy that continues to create jobs. Some sectors are still struggling, such as manufacturing, but modest gains were seen there as well. The data shows signs of wage inflation ticking higher again in January, which will certainly need to be monitored, but I don’t see Wall Street getting overly concerned until/unless it sees this become a sustained trend in future reports.

The markets remain headline driven as we head into the weekend. China’s retaliatory tariffs were somewhat limited, but they are set to go into effect on Monday. That has traders watching for signs of some type of agreement over the weekend, although that’s more hope than expectation. We’ve heard rumors inside of China of a possible revival of the Phase-One trade deal between China and the United States that was inked in President Trump’s first term in office. In fact, Trump’s nominee for the office of U.S. Trade Representative, Jamieson Greer, indicated that he would try to revive the deal, echoing an earlier report saying that was part of Beijing’s original proposal. Greer testified in his confirmation hearing this week that he would work to narrow the massive trade deficit with China. The hope would be that such a narrowing would be the product of China buying significantly more commodities from the United States, but it could also mean further decreasing the purchases of consumer goods imported from China.

There are unconfirmed rumors inside of China that part of its offer to restore the Phase-One trade deal included initial offers to purchase 3 million metric tons of U.S. soybeans and 2 mmt of U.S. corn. That’s a far cry from the 35 - 40 mmt of U.S. soybeans that China once purchased annually from the United States. This year’s delayed harvest of soybeans in Brazil due to late planting and wet harvest conditions has delayed the arrival of soybeans reaching Chinese ports. As such, China is expected to take delivery of roughly 5 mmt of soybeans in February, followed by just 4 mmt in March. That would bring January to March deliveries to an estimated 16.28 mmt (600 million bushels), down 2.3 mmt from the previous year’s pace. China could fill that void with shipments from the U.S. Pacific Northwest, where transit times of 18 days are roughly half that of soybeans coming from Brazil. And that may happen. But China has also indicated that it will open up its reserves to help fill the void, which is something that I warned late last summer that we could see happen after a stretch of very strong shipments from Argentina to boost its reserves for such a time as this. The bottom line is that China doesn’t “need” U.S. corn or soybeans currently. Domestic cash corn prices are cheap, and it has sufficient soybean reserves to carry it until the much cheaper big Brazilian crop arrives. The question then would be, how badly does China want a trade agreement with the United States to get more favorable tariff treatment on the $450 billion in consumer goods that it ships to the United States each year? Is it worth paying an extra $1 per bushel to simply put the corn and soybeans into its reserves to use when Trump is out of office? Perhaps so, but we’ll see.

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Perspective: Morning Commentary for February 7

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