It was just a few weeks ago that the NOAA’s Climate Prediction Center gave its April update saying the current El Nino is weakening. At the same time, they issued a formal watch for a fall arrival of La Nina, saying there is a 70% chance for the flip side of El Nino. Now, over the past few weeks, the Pacific Ocean has been stirring with activity as the warm waters of El Nino are giving way to the colder waters of La Nina. Since November, sea surface temperatures hit their peak warmness in the tropical Pacific Ocean, but the cool-off over the last two weeks has been anything but steady. According to Karen Braun over at Reuters, a cold pool that is characteristic of La Nina has been lingering beneath the surface of the topical Pacific Ocean for quite some time now. Over the last two weeks, it finally replaced warm surface waters in the Eastern Pacific, aided by strong La Nina-supporting trade winds. As a result, the temperature trend in the Nino region in the Pacific Ocean, off the coast of Peru, has changed drastically over the past two weeks. Between April 6 and April 13, the sea surface temperatures dropped 1.5 degrees C, and an additional 0.9 degree was shaved off in the following week. This effectively puts the Nino region firmly in La Nina territory. To further highlight the significance, there were only three weeks out of 1,373 that saw 1.5 degree drop since weekly records began. The rapid cooling of the eastern Nino regions not only proves just how cold the water below the surface is, but that it also means business. Before we get too far ahead of ourselves, right now this cool anomaly is in one section of the Nino region. That is why they are calling it a “mini La Nina.” Bottom line, El Nino is rapidly weakening and conditions are favorable for La Nina by as early as the start of June.
Soybeans bulls continue to digest more worrisome production headlines out of Argentina as some reports circulating now show +25 to +27 inches of rain has fallen in some areas during the first 20-days of April. As a result perhaps a much larger portion of the crop has been damaged or is now unable to get out of the field. Remember the USDA most recently bumped their Argentine production estimate higher from 58.5 MMTs in March to 59.0 MMTs in April, meaning a lot of folks have been caught leaning the wrong direction in regard to Argentine crop. At first the late-rains looked to be a “good thing”, then all of a sudden too much a “good thing” became a very bad thing. This now has some wondering how the rains here in the U.S. will ultimately play out? I’m also hearing some bulls talk about the fact Argentina will be moving from Autumn to Winter in the coming weeks. As we know the northern parts of Argentina are normally mild during the winter months; slightly cooler in the center; and cold in the southern parts with the latter experiencing frequent frost and snow. Meaning an early frost could create problems for crops that are still in the fields, waiting to dry out before they can be harvested. Be careful getting yourself overly bulled up on these types of headline, as most of the Argentine soybeans are grown in the central and northern regions as indicated in the graphic below by Cañon-Imbren.
The U.S. soybean crop appears to be off to a good start with the USDA reporting 3% of the corp now planted vs. 2% last year and 2% on average. States like Arkansas, Illinois, Iowa, Minnesota and Missouri are all running ahead of schedule. This obviously helps the bears talk more aggressively about U.S. soybean acres increasing beyond what the USDA estimated back in late-March.
Corn bears are pointing to a rather quick pace to U.S. planting. The USDA showed yesterday that 30% of the crop is now in the ground, which is nearly double the 16% planted last year and a 20% 5-year average. Data suggest nearly 16 million acres of corn were planted last week by U.S. producers. It’s usually not until the first or second week of May that we see the U.S. producer get an opportunity to plant 16 to 17 million acres. Keep in mind we still have just over 63 million acres to plant, but we are certainly off to a good start. Below are a few interesting highlights from the latest USDA planting data: As a producer I continue to keep my hedges in place…
- Illinois 42% planted vs. 26% last year vs. 25% on average.
- Iowa 40% planted vs. 12% last year vs. 9% average. In other words the farmers in Iowa planted about 3.75 million corn acres last week.
- Kansas 43% planted vs. 29% last year vs. 27% on average. Also reporting 22% of their corn “emerged”.
- Kentucky 50% planted vs. 6% last year vs. 28% on average.
- Minnesota 45% vs. 31% last year vs. 11% average. The 2nd highest amount planted by this date on record.
- Missouri 80% planted vs. 17% last year vs. 31% average. The state advanced 23% last week the highest % planted for week-16 since at least 1979. Also reporting 24% of their corn “emerged”.
- Nebraska 16% planted vs. 13% last year vs. 11% average. Despite the rain delays they are still ahead of schedule.
- Wisconsin 10% planted vs. 4% last year vs. 3% on average.
Investors will be on their edge of their seats this week wondering if the U.S stock market can continue its climb back to all-time highs, and if the recent “risk-on” rally in commodities is for real or just a temporary blip on the radar? The obvious 800-pound gorilla in the room will be the U.S. Fed, who holds a two-day meeting this week with the announcement of any policy change or shift in rhetoric coming on Wednesday afternoon. The big question is with the recent rally in the stock market and commodities showing more signs of life, will the Fed turn back to more hawkish language in their follow-up statement? Keep in mind the U.S. labor market appears to be fairly robust while inflation might be waking up a bit, two main factors the Fed has been monitoring. Another interesting dynamic is the recent perception by the funds that China might be starting to turn the corner back towards growth. Most in the markets have been reading the same old headlines that document China is recording its slowest pace of growth in the last decade. But if we dig a bit deeper and read between the lines like many of today’s largest money-managers we might see a slightly different story. China’s government has made it clear that they want their economy to evolve beyond the “factory of the world” to a more “consumption” driven machine like that of the U.S.. Some early first-quarter earnings reports might just indicate this evolution is indeed taking place – General Motors described Chinese growth in its SUV and luxury segments as “robust”, and is expecting the country’s vehicle market to increase by 5 million units or more in the next 3-5 years, representing growth of about 3-5 percent annually.” Athletic apparel maker Under Armour said its first-quarter sales in China TRIPLED. Yum Brands, parent company of KFC and Taco Bell, are also seeing a recent huge surge in Chinese sales. Same store sales grew +12% in the quarter, with overall growth of +42% in their Chinese business. Starbucks has also reported strength in China, witnessing a “stunning +18% increase in revenues and a +5% increase in transactions in China.” Overall, in gauging the health of the Chinese economy, it might make more sense to turn some of our focus away from China’s manufacturing sector and concentrate more closely on the Chinese consumer, that’s where they are focused on growth. This recent data is defiantly prompting the smart investors to rethink the old Chinese logic. In return we are defiantly seeing some shifts and changes in the underlying global investment landscape. U.S. corporate earnings will also be in focus this week with almost 40% of the S&P 500 reporting this week. Apple is the obvious main attraction on Tuesday with their earnings data being released after the closing bell. Remember, even though Apple is estimated to be about 3.2% of the S&P 500 by market cap, it’s closer to 5% to 6% of the S&P 500 by earnings weight. In other words they make up a huge chunk of the overall market. There’s been a ton of uncertainty as of late regarding Apple’s “growth rate” and if their 2015 high just under $135 per share will be retested? Keep in mind a company this large, however great it might be, still has many moving pieces which make it extremely difficult to forecast direction. Key macro components for Apple and other U.S. behemoths in the coming months will be the upcoming U.S. election, the current U.S. tax code, the billions in cash many companies, including Apple, is estimated to have sitting overseas, the strength of the U.S. dollar and how it might be distorting valuations, the Chinese economy and emerging market struggles, etc…