Perspective: Morning Commentary for April 30

April 30 – Stocks came under pressure following the release of this morning’s employment cost data that came in hotter than expected, raising fears that the sentiment for “higher for longer” interest rates may gain additional momentum in this week’s Federal Reserve discussions. The VIX is trading back near 15 this morning following the above data release, with the dollar index following Treasury yields higher, trading currently near 106.0. Yields on 10-year Treasuries are trading near 4.67%, while yields on 2-year Treasuries are trading near 5.02%, after briefly probing to a fresh five-month high above 5.03%. Crude oil prices are modestly lower this morning, while the grain and oilseed sector traded mostly lower overnight as well.

The employment cost index rose 1.2% quarter-on-quarter in the first quarter of this year, up from 0.9% growth the previous quarter, and exceeding analyst expectations of 0.9% growth. The employment cost index rose 4.2% year-on-year in the first quarter, which matches what the previous quarter originally posted, but this morning’s revisions pushed the fourth quarter of last year up to 4.3%. This morning’s employment data reiterates that wage inflation pressures continue to be a factor in the economy, thanks to the tight jobs market. Stocks dropped on the data release on expectations that members of the Federal Open Market Committee will take note of the data as they open two days of meetings this morning. That is expected to support arguments of the hawks on the committee to keep interest rates “high” for longer. An interest rate cut at this time would be expected to add more juice to the economy, further tightening the jobs market and adding to those inflationary pressures.

The Politburo – China’s top policymaking body – met today to address that country’s economic problems. That speaks to the significance of China’s economic problems, but it also sends a message of hope that China’s leadership understands the problems, and that they are not deaf to them. The Politburo’s primary focus was said to be on the real estate sector, which has seen disappointingly low support from officials to this point. The policy board stated that it will continue its expansionary fiscal and monetary policies to manage weak domestic demand for property amid an uncertain external environment, utilizing tools such as interest rates and the bank reserve requirement ratio to stimulate growth. Furthermore, it announced that fiscal authorities plan to introduce ultra-long special treasury bonds soon, while accelerating the issuance of special local government bonds while maintaining robust fiscal spending. Authorities are pushing for completion of unfinished housing projects and they are formulating policies to manage existing housing stock and to improve new homes to better match market demand.

USDA reports that the winter wheat condition index score fell another two points this week to 334, with soft red winter wheat ratings generally steady to higher, while hard red winter wheat scores were mixed to lower. Significantly, hard red winter wheat condition index scores fell notably in Kansas, Nebraska, Colorado, and Oklahoma, with nearly a third (31%) of Kansas’ crop now rated Poor to Very Poor, up from 26% last week. Commodity Weather Group notes that roughly 50% of the hard red winter wheat crop remains under drought stress, with just limited opportunity for relief at this critical stage of crop development. USDA crop surveyors are in the fields making yield estimates this week, with the results of those field surveys expected to impact the agency’s first production estimates of the year when released at the end of next week. Dry areas of southern Russia have the opportunity for some showers next week, but Commodity Weather Group believes that the region will only see limited relief at that point. Meanwhile, some excessively wet areas of Europe are expected to see some relief. What is known at this point is that the above risks should provide some underlying support to the market, but traders still lack justification for sustaining the rally as long as Russia pushes cheap wheat through its ports at a record pace.

Midwest farmers aggressively planted corn and soybeans ahead of late-week rains last week, easing concerns regarding this week’s anticipated planting delays. In fact, I believe that the corn planting progress was likely faster than was caught in the survey data, which should be reflected in next week’s data, even though planters will remain parked in many areas this week. USDA reports that 27% of the crop was planted as of Sunday, up from 12% the previous week and above the five-year average pace of 22%. That includes 39% of Iowa corn being planted as of Sunday, as well as 30% of Minnesota and 25% of Illinois corn, and we haven’t turned the calendar to May yet. This morning’s weather models look a bit wetter than yesterday for week #2, so we’ll need to monitor the risks that the current wet pattern could get locked in for longer than we’d like. But for now, the mantra is that “rain makes grain.” I do expect USDA to begin ratcheting its Argentine and Brazilian corn production estimates lower next week, but that probably won’t matter at this point as long as the U.S. crop looks good. Meanwhile, a labor strike at Argentine crush facilities supports U.S. soymeal demand, providing underlying support for soybeans as well.