Perspective: Morning Commentary for February 19

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

February 19 – Stock futures were modestly lower overnight after President Trump spoke again of new tariffs late on Tuesday, targeting autos and pharmaceuticals in his latest comments. Yet, stocks continue to trade near record high levels, despite the tariff nervousness. The VIX is trading near 16 this morning, while the dollar index is trading near 107.1. Yields on 10-year Treasuries are trading near 4.57%, while yields on 2-year Treasuries are trading near 4.31%. Crude oil prices are 1% higher in follow-through buying after uncovering buying interest just above $70 per barrel on Tuesday, while the grain and oilseed markets traded mixed to mostly weaker this morning.

President Trump spoke again of tariffs on Tuesday. His team is currently assessing trade, with a commitment to get its recommendations to him by April 1^st. Trump stated Tuesday that he expects to raise tariffs on auto imports by roughly 25% on April 2^nd. Similar tariffs are expected to be placed on pharmaceuticals and semiconductors that are imported. Trump previously stated that he hopes that other countries will negotiate lower tariffs, but it is yet to be seen whether that will happen. Europe currently charges a 10% tariff on U.S. passenger cars that it imports, whereas the U.S. charges a 2.5% tariff. However, the United States charges a 25% tariff on imported pickup trucks coming from anywhere other than Canada or Mexico. Trump claimed that Europe had already indicated that it might be willing to lower its tariffs, although European lawmakers denied that claim.

Housing starts fell by more than expected in January, while permits for new starts held the pace seen in December, doing a bit better than expected. Housing starts in January dropped to an annualized rate of 1.366 million units, down from 1.499 million the previous month, and below analyst expectations of 1.397 million. Permits for new starts held steady at 1.483 million in January, which came in a bit above analyst expectations of 1.470 million. Mortgage rates have been on a bit of a roller coaster recently due to volatility in the Treasury market. Yields on 10-year Treasuries surged last week, before breaking again at the end of the week. Nonetheless, mortgage applications for purchasing a home dropped 5.9% on the week ending February 14, while mortgage applications for refinancing fell 7.3%. This follows a drop in the housing market index on Tuesday that reflected in a decline in sentiment for the home building sector due to rising mortgage rates and uncertainty about the future.

New home prices have stabilized over the past couple of months in China, which authorities will take as a win following a steady decline in recent years as excess inventories mounted. Yet, home prices in January were still down 5.0% year-on-year, versus being down 5.4% on the year in December. Authorities hope to see the property market turn around as local governments pick up the pace of purchasing land and unsold housing properties. Yet, official data shows that unsold new homes total 391 million square meters, which is nearly a record high. Government purchases thus far total 30 billion yuan, which is a drop in the bucket of the 10 trillion yuan of annual sales. In other words, stimulus programs have stabilized the property sector, but they have thus far not come close to solving the problem, especially in an environment where China’s population has declined by several million over the past three years, decreasing demand.

China continues to unwind its holdings of U.S. Treasuries, continuing a trend seen over the past 14 years. China holds $759 billion in U.S. Treasuries, down 1.25% on the month and down 7.0% on the year. China held $1.14 trillion in Treasuries in March 2021, although it peaked at near $1.4 trillion in 2011 & 2013 when it was the largest foreign holder of U.S. debt certificates. Japan now holds that position at $1.1 trillion. However, Japanese investors are also bringing money home after years of negative interest rates there have come to an end with rising rates. Japanese ownership dropped 2.5% in December after dropping 1.3% percent on the month in November and dropping 5% over the past year. Foreign ownership of U.S. Treasuries totals $8.513 trillion, down 1.4% on the month and down 7.2% year-on-year. The decrease in foreign buyers of U.S. debt certificates at a time when rising fiscal spending was increasing the supply of those certificates is part of what elevated 10-year Treasuries yields over the past six months when the Federal Reserve was cutting short-term rates.

Europe delayed deforestation requirements for commodity imports by a year, but another regulation may hit U.S. soybean shipments to that market. The European Commission will consider this week limits on imports of products that do not meet its “standards.” That includes crops produced with inputs that are banned in Europe. The European Union bans many pesticides – even some that have been deemed safe at low levels by scientific agencies. As such, imports of soybeans and other products produced with those products would be banned. The EU is expected to approach this ban on a crop-by-crop basis. EU farmers are also protesting many of these strict EU product bans.

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