Perspective: Morning Commentary for April 24

April 24 – Stocks had a positive tone early this morning on good earnings reports, but then they turned more mixed following the release of the March durable goods orders data. The VIX is trading near 16 this morning, while the dollar index is trading near 105.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.94%. Crude oil prices are modestly lower at this hour, as were most of the grain and oilseed contracts amid a firmer dollar, although like yesterday, modest buying emerged to support prices following the pause.

Durable goods orders rose 2.6% month-on-month in March, beating analyst expectations of 2.3% growth. Part of the reason for the stronger month-on-month gain was that the February number was downgraded to 0.7% growth, down from the 1.4% growth originally reported. Durable goods orders ex-transportation gained 0.2% month-on-month, falling short of expectations of 0.3% growth, but a downgrade of the February data did not help here. February durable goods orders ex-transportation gained just 0.1%, down from the 0.5% originally reported. Core capital goods orders are a good read on business sentiment, and they rose 0.2% month-on-month as expected, while the February number was revised lower to 0.4%, down from the 0.7% originally reported. The headline number has more volatility due to changes in transportation orders. Overall, today’s numbers indicate steady, but not robust, growth for the economy.

U.S. Secretary of State Antony Blinken arrived in Shanghai today to meet with officials of the Chinese Communist Party. Blinken is the latest of a string of U.S. diplomats sent to China to increase communication with China’s government, but that doesn’t mean that tensions have eased. Talking is good, but the policy gaps remain quite wide between the two world powers, and Blinken’s visit over the next several days is not expected to bring them any closer together, although the conversations may help to avoid unnecessary misunderstandings. Taiwan remains a hotspot between the two nations, after Congress approved aid this week to help Taiwan defend itself against a potential attempt by the Mainland to gain control over the island nation. Taiwan will be installing a pro-independence president next month, and China prefers that it not receive support from other nations toward independence.

Furthermore, the United States is working on sanctions against some Chinese banks for what it considers to be aid and support for Russia’s war efforts. Washington has thus far stopped short of sanctioning major Chinese banks due to the adverse impact it could have on our relationship with China, as well as the global economy, but the sanctions would reportedly prevent the targeted banks from access to the global SWIFT banking system, and that angers China. These issues are merely some of the top ones on a long list of contentious issues between the two countries, not to mention tensions over the South China Sea, trade issues, human rights, etc. Talk is good, but the two countries continue to follow very different paths with very different core values driving them. Those tensions find their way into impacting trade in the commodity sector, whether directly or indirectly. China will buy from us what it needs when other alternatives are not available, but increasingly, other alternatives are available, and at cheaper prices when currency exchange rates are factored into the equation.

Wall Street shifts its focus a bit this week to earnings reports, considering the plethora of reports due out this week, although it will also take note of tomorrow’s first read on first quarter gross domestic product, and Friday’s read on PCE inflation. It should not be missed by traders that the United States has the strongest economy in the world with roughly a 5.25% base interest rate, while inflation remains above the 2% mandate. The Federal Reserve may yield to political and public pressure with a rate cut. But doing so in the current environment would simply add more juice to the economy, increasing reinflation strains, possibly requiring the Fed to come back with a rate hike again. The Fed seems to be recognizing that it created some problems for itself at the March meeting with a decidedly dovish tone, with various members sounding more hawkish in recent days. It would be interesting to see what changes we would see in the dot plot graphic if it were done again today, but we won’t see another one until the June meeting.

A cheap Brazilian real and the recent corn and soybean rally are encouraging an uptick in producer selling there that limits gains in those markets. Wheat doesn’t face that same producer selling, allowing fund short covering to push futures prices above the 100-day moving average, which may encourage additional fund short covering. Fundamentally, it’s difficult to justify more of a move at this point, until we learn more about how the weather will impact production in the U.S. Plains, Europe, and in the Black Sea Region. But it is a futures market, which trades future potential risks, and money flow often takes prices either higher or lower than fundamentally justified at the time. As such, the current rally in corn, soybeans and wheat has to be respected as an opportunity, while sustaining the rally will require more weather pieces to come together in the weeks and months ahead. That might happen, but the odds are still currently below 50%.