Perspective: Morning Commentary for April 16

April 16 – Stocks rebounded a bit overnight, as traders celebrated a pull back in Treasury yields and bank earnings beat estimates. Yet, the VIX is trading near 19 at this hour, after posting a new five-month high earlier this morning, slipping lower following weaker-than-expected housing starts. We still live in a world where bad news is good news on Wall Street, because traders are more focused on what the Federal Reserve might do than they are on the current health of the economy. Afterall, it’s a futures market, and traders believe that the future is shaped by monetary policy, even though that hasn’t played out as they expected over the past several years. The dollar index is trading near 106.2, after previously setting a fresh five-month high above 106.4 earlier this morning. Yields on 10-year Treasuries are trading are trading at fresh five-month highs near 4.67%, while yields on 2-year yields are trading near 4.96%. Crude oil prices are modestly weaker at this hour. The European Union is considering sanctioning Iran following its weekend attack on Israel, while the Biden Administration is indicating that it likely will not do so, reducing the risk that we’ll see a reduction of oil available to the market. The broader commodity sector continues to experience modest headwinds from the strong dollar, with the grain and oilseed markets mostly lower once again this morning, lacking a story to justify doing otherwise.

Housing starts fell to an annualized rate of 1.321 million units in March, down from 1.549 million the previous month, and down from analyst expectations of 1.480 million. Permits for new housing starts fell to an annualized rate of 1.458 million in March, down from 1.523 million in February, and below analyst expectations of 1.510 million. We’re still facing a shortage of housing in this country, but permits and new starts tend to occur when the consumer is confident enough in the economy to take the plunge and make the longer-term financial commitment required to build a house. This suggests that consumers sensed that we were in an elevated risk environment in March, making them less risk averse. Wall Street interprets that as an indication of a slowing economy that makes the Federal Reserve more likely to cut rates in the future. The problem for the Fed is that we see housing starts surge again any time that the market perceives that rate cuts are imminent, reinjecting inflation risks. We won’t be able to get out of this cycle until we reach a surplus of housing, which isn’t likely for some time.

China’s industrial output increased 4.5% year-on-year in March, up from 4.2% previously, but well below the 5.4% expected by the market. The property sector continues to be a drag on China’s economy, falling 9.5% year-on-year in the first quarter of this year, after falling 9% in the first two months of the year. That suggests deteriorating momentum in the property sector. Construction related industries provide jobs for 100 million Chinese, making this a significant issue. The typical resident has 40% of his/her assets in property, so consumer sentiment is also closely tied to the health of the property sector. New home sales fell 19.4% in the first quarter of the year, with total sales revenue down 27.6% year-on-year.

China’s swine industry produced more hogs than the rest of the world combined, prior to African Swine Fever. Since then, softer per-capita consumption and a declining population has made those previous numbers difficult to achieve. China’s hog inventory fell to 408.5 million pigs at the end of the first quarter of this year, down 5.9% from the previous quarter, and down 5.21% from the previous year. It’s the smallest hog herd in three years, but farm margins continue to be compressed, providing little incentive for rebuilding the herd. In fact, smaller operations still face incentives to cut production capacity. This suggests reduced feed demand going forward. Overall, total pounds of pork production slipped 0.4% year-on-year in the first quarter, while beef and poultry meat production rose by 3.6% and 6.1% year-on-year respectively as consumers diversify their tastes for meat.

China purchased 35 – 40 cargoes of soybeans last week, primarily from Brazil for April to June shipment. It crushed more than it imported the past several months while buyers waited for cheap Brazilian new-crop supplies, so we expected the pace to pick up as newly harvested supplies became available. U.S. soybean shipments to China from September to March totaled 20.8 million metric tons, down 7.2 mmt on the year as shipments from Brazil more than compensated for the reduced demand for U.S. soybeans. China has also booked 3.8 mmt of new-crop Argentine soybeans for April to June shipment, presumably for its reserves, which is expected to again reduce its demand for U.S. soybeans six to eight months from now. The primary question then remains, will the switch back to La Nina reduce South America’s supply in the coming year, or will we see this trend continue going forward?