Perspective: Morning Commentary for July 25

July 25 – Stock futures reacted positively to this morning’s economic data, although cautiously so as more data will come tomorrow, along with earnings reports. The VIX spiked to a fresh three-month high above 19 early this morning, but it pulled back to trade closer to 18 following this morning’s data release. The dollar index firmed with Treasury yields on the data release, putting it near 104.4 at this hour. Yields on 10-year Treasuries are trading near 4.25%, while yields on 2-year Treasuries are trading near 4.42%, after spiking to a fresh half-year low near 4.39% overnight. Crude oil prices posted fresh six-week lows this morning on the continuation charts, while the grain and oilseed markets are mixed after corn and soybean prices firmed as U.S. trading desks opened.

Gross domestic product rose at an annualized rate of 2.8% quarter over quarter in the second quarter of this year, doubling the previous quarter’s growth of 1.4%, and exceeding analyst expectations of 2.0%. The growth came amid solid consumer spending, with personal consumption expenditures growing at an annualized rate of 2.3% over the previous quarter, up from 1.5% the previous quarter, and above analyst expectations of 1.9%. We’ll see updated personal consumption data for June – the final month of the second quarter – tomorrow morning, which will provide a better idea if the growth was more front-loaded for the quarter or not.

Durable goods orders fell 6.6% month-on-month in June, down from 0.1% growth in May, and way below analyst expectations of 0.3% growth. But the headline number was deceptive – not telling the whole story. Durable goods orders excluding transportation grew 0.5% month-on-month in June, versus a 0.1% decline in May, and versus analyst expectations of 0.2% growth. Durable goods orders for core capital goods, which is seen as an indicator of the business climate, rose 1.0% month-on-month in June, up from a downwardly revised -0.9% in May, and up from analyst expectations of 0.2% growth.

First-time claims for jobless benefits fell to 235K in the week ending July 20, down from 245K the previous week, and below analyst expectations of 238K. The four-week moving average was near unchanged at 235.5K claims, up slightly from 235.25K the previous week. Continuing claims for the week ending July 13 rose modestly by 9,000 to 1.851 million, with the four-week moving average also rising slightly by 4,750 to 1.834 million. Today’s data suggests that the recent rise in jobless claims may be plateauing, although we’ll need to see a couple more weeks of data to confirm that. Much of the above data suggests a resilient economy that may be trying to bounce back, raising questions about whether the Federal Reserve really needs to cut rates in September, although one almost gets a sense that members of the Federal Open Market Committee are looking for an excuse to be the “good guys” for once after several years of constant criticism. As such, they may cut rates regardless.

The People’s Bank of China made another surprise move today – cutting its benchmark MLF lending rate by 20 basis points to 2.3%. But once again, that failed to impress investors, with the Shanghai Composite Index down another half-percent at the close. Major Chinese banks also cut deposit rates today, trying to encourage more spending versus saving. The yuan bounced 0.8% versus the dollar in what appeared to be intervention to defend the yuan’s value on the global currency markets. Traders and analysts remain doubtful whether Chinese authorities will be able to implement effective policy to reach 5% GDP growth this year, which is seen as necessary for sustaining its economy and for restoring confidence in it. Investors are now looking to the Politburo meeting at the end of this month for signs of more aggressive policy support for the economy.

Typhoon Gemei is expected to produce widespread heavy rainfall and high winds across many crop growing areas of eastern China over the next several days. At risk is the early rice crop that is in the final harvest stages, as well as corn and soybeans in impacted areas of the northeast of China, where flooding risks will be further elevated for low-lying areas as the rains fall on already saturated soils. We’ll continue to monitor the situation for evidence of sufficient crop loss to justify an increase in Chinese imports.

Day #2 of the Wheat Quality Council tour of the North Dakota spring wheat crop again suggests that the region could see a big crop, albeit with some scab problems. Day #1 of the tour found average yields more than 10 bushels above the five-year average (excluding 2020), and Day #2 founds yields 13.5 bushels above the five-year average. In fact, this may be the biggest crop in 30 years for the region. Elsewhere, heat continues to build into much of the Midwest crop belt, with an increase in rainfall opportunities to go with it. However, the western 20% of the Corn Belt looks most at risk of missing out on the rains amid the increased heat.