Perspective: Morning Commentary for February 27

February 27 – Stock futures traded cautiously mixed following this morning’s durable goods orders data, as they wait for additional key economic data later this week, while also monitor negotiations to keep the government open. The VIX is trading below 14 again this morning, while the dollar index is trading near 103.8. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 4.70%. Crude oil prices are mixed to firmer in relatively quiet trade, while the grain and oilseed sector traded higher overnight, following through on impressive chart reversals on Monday, but lacking fundamental support to add energy to the buying thus far.

Durable goods orders fell 6.1% month-on-month in January, which was worse than the 4.5% decline expected by analysts. Furthermore, December orders were revised down to 0.3% declines from the flat reading originally reported. However, durable goods orders minus transportation only fell 0.3% month-on-month in January. That was still below the 0.2% gains expected by analysts. Furthermore, the December data was revised to 0.1% losses, down from the 0.6% gains originally reported. Core capital goods orders, which provide an indication of business confidence, rose 0.1% month-on-month in January, matching analyst expectations. However, the December number was revised to 0.6% losses, down from the 0.3% gains originally reported. The bottom line is that transportation orders dropped notably in January. Business orders for capital goods were stable in January, but worse than first believed for December. This isn’t a strong report, but neither is it a disastrous report, although it certainly raises some red flags about the economy. Treasury yields initially fell on the data release, but then rallied as traders dug deeper into the data.

A partial government shutdown is possible at midnight on Friday if Congress fails to pass stopgap funding to keep it open. All essential services would continue if there were a shutdown, as well as those government agencies already funded by previously passed legislation. Those areas that a shutdown would impact include Agriculture, Rural Development, and the Food and Drug Administration; Energy and Water Development; Military Construction and Veterans Affairs; and Transportation, Housing and Urban Development. Historically, Wall Street hasn’t shown much interest in partial government shutdowns, unless it lasts long enough to start proving to be a drag on the economy. However, traders do care if the shutdown, or even the threat of such, results in a downgrade of the U.S. credit rating, which tends to raise interest costs for both government and private debt. As such, that remains the market risk for Wall Street.

Sixty-three percent of American firms operating within China plan to reinvest in China this year, according to a survey conducted by the American Chamber of Commerce (AmCham). However, that’s down by 5 percentage points from its previous poll, reflecting the ongoing trend of a reluctance of foreign companies from the West to invest in China. Nearly 80% of polled foreign companies operating in China had relatively low reinvestment budgets of less than $10 million this year. Most companies indicated that they had no immediate plan to withdraw business from China, but the trend of notable budget cutting among foreign companies remains a concern for China. It suggests that ongoing political pressure and China’s continued economic woes will likely continue to curb foreign investments. The president of AmCham expects the Chinese economy to continue to lose steam this year, anticipating that growth in its gross domestic product will slip as low as 4.6% by 2028.

Chinese buyers purchased just 10 cargoes of soybeans last week, which is below the pace needed to hit China’s annual import target of 100 million metric tons. Buyers have thus far been rewarded by being patient, and allowing prices to come to them, knowing that domestic demand is soft as well as producers continue to curb the size of the hog breeding herd, which dropped another 1.8% month-on-month in January. Chinese buying for April to August shipment is expected to come almost exclusively from South America – primarily Brazil. Soybeans priced for shipment from Brazil continue to be roughly $2 per bushel cheaper than those imported from the U.S. Gulf. Loadings out of Brazil ports are now topping 2 mmt per week and gaining momentum. It takes roughly 45 days for soybeans to reach Chinese ports from Brazil, so China is still supplementing its needs with U.S. soybeans. Production estimates for Brazil, Paraguay, and Argentina continue to slowly decline, but there’s still little evidence that they will fall enough to justify rationing U.S. demand with higher prices. Nonetheless, grain and oilseed prices engaged in another short covering rally late yesterday into overnight trade after reaching oversold conditions.