Corn Climaxes

Corn futures have jumped massively in recent weeks. It made fresh new high today. A record high price for corn is caused by fears of supply shock owing to (1) harsh weather condition and (2) very low inventory.

The USDA tracks the weather condition during the growing season on a weekly basis. According to the USDA, "excellent condition" has plunged to the lowest level ever.

Inventory has been plunging since 2009, thanks to a jump in usage of corn to make ethanol. In 2002, 10% of domestic corn production was used to make ethanol. In 2011, it has reached 40%, and it the amount was more than used for feedstock.

Much Ado About GDP Revision

The annual revision to GDP last Friday was a non-event. The annual revision, which goes back 3 years (from 2009-Q1 through 2012-Q1), the BEA revised the growth profile marginally (2009 +0.4%, 2010 -0.6%, 2011 +0.1). The net result was that real GDP level in 2012-Q1 was 0.1% higher than before the revision.

Last year, the BEA revised down the growth profile massively (2008 -0.3%, 2009 -0.9%, 2010 +0.1%. The net result was that real GDP level in 2011-Q1 was lower by a whopping 1.6% versus before the revision.

Following the “out of the left field” annual revision last year, market started to price in QE. It eventually got one when Chairman Bernanke give hints of QE2 in a speech at the Jackson Hole Meeting. Looks like market was expecting, or more appropriately, protecting against a similar surprise.

When the annual revision came in as a “non-event”, treasuries sold-off. Last Friday, yield on treasury rose from 1.40% to 1.60% before settling at 1.55% - 20bp move in 10Y treasury is a huge move.

Mario (Draghi) Saves the Market

European equities rallied, euro/$ rate jumped over a percent and Spanish 10-year fell by 45bp. All thanks to comments by Draghi at a pre-Olyimpics Global Investment Conference in London this morning.

What did Draghi say? Two things, (1) “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough” and (2) “To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate”.

While the timing of Draghi’s comments came as a surprise, the fact that he talked about euro and sovereign premia did not. In fact, investors were expecting it to come imminently. The simple reason is that every time Spanish yield rose above 6%, there had been some form of reaction from European policymaker, verbally or otherwise, to push the yield back to below 6%. The only difference has been that the pain threshold leading to the reaction has steadily increased over time.

The first time Spanish yield rose over 6% was in July 2011, just a year ago. It rose steadily going into the European Banking Authority (EBA) stress tests results on July 15, 2011. When the results came in, only 8 banks failed and a mere €2.5bn of new capital was required. That along with positive comments on Greece rescue plans ahead of the July 21^st EU Summit started to push Spanish yield lower. As such, the auction of Spain’s 18-month T-bill on July 19^th was over-subscribed. The EU Summit confirmed investors’ expectations. At the Summit the leaders attempted to prevent Greek contagion from spreading to other peripheral European countries by providing additional help to Greece (extending the maturity of new EFSF loans and significantly lowering interest rates) and allowing the EFSF to buy bonds in secondary markets.

The second time Spanish yield rose over 6% was in November 2011. Again, concerns over the European project rose and reached a peak when the German bond  auction was under-subscribed on November 23^rd. Again, policymakers started to make noise going into the December 9^th EU Summit, which helped push Spanish yield lower. Essentially, the debate started to move towards a fiscal union.  The summit confirmed the rumors. They agreed on principal on a fiscal union but did not flush out the details.

This time Spanish bond yield jumped over 7% on concerns that regional governments are seeking financial aid from the central government. On July 22, Bloomberg reported that, “Catalonia May Follow Valencia in Bailout Request”. As the pressure kept building on Spanish bond, the market was waiting for some form of reaction from policymakers and they got one today.

The rally in risky assets is likely to be short-lived because it is short-covering.