By: Arlan Suderman, Chief Commodities Economist
August 13 – The major stock indices traded quietly mixed overnight ahead of this morning’s weekly job numbers and producer price index data. Like Wednesday, this morning’s data was considered good as well, providing support for stocks while generally allowing Treasury yields to slip a bit lower. The VIX is trading near 14.4, which is just above yesterday’s new low for the year. The dollar index is trading near 99.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.15%. WTI crude oil is trading near $81 per barrel, while Brent trades near $87 per barrel. Wheat prices again firmed overnight on geopolitical risks in the Black Sea Region, while corn and soybean prices pulled back modestly from yesterday’s big gains.
The headline producer price index was flat on the month in July, versus analyst expectations it would rise 0.2%. The June number was revised to -0.1%, up from the original -0.3%. So less deflation than thought in June, and less inflation than previously thought in July. The headline PPI rose 4.7% on the year in July, falling short of analyst expectations of 4.9% inflation, and down from the 5.5% pace in June. The core PPI that excludes food and energy prices rose 0.2% on the month in July, matching the previous month, but falling below analyst expectations of 0.3% inflation. The core PPI rose 4.2% on the year in July, matching analyst expectations, but down from 4.7% the previous month. The bottom line is that inflation at the wholesale level is still too high, and the longer-term trend is higher. Yet, the recent trend has been for improvement in inflation at both the consumer and wholesale level. The bigger question for policymakers at the Federal Reserve is, are we seeing an aberration in the pattern that looks good, or is this a trend that will continue until it takes us back down to the 2% mandated level, and if so, will it get us down there quickly enough? One of the great challenges to that question is the fact that we have two wars going on right now that have become wars on commodity logistics, and that makes it very challenging to bring down inflation risks until those conflicts are settled. Unfortunately, I do not see us as being close to settling either one soon.
First-time claims for unemployment benefits rose to 209K in the week ending August 8, but that is still a very low number. Even so, last week’s total is up from 200K claims the previous week, and above analyst expectations of 203K claims. The four-week moving average for claims was unchanged at 199K. Continuing claims for the week ending August 1 totaled 1.777 million, down 22,000 from the previous week. The four-week moving average for continuing claims dropped to 1.786 million, down 5,250 from the previous week. There are some areas of concern in the jobs sector that showed up in Friday’s monthly jobs report, but there are also some very positive recent developments as well, adding to the mixed outlook currently facing the Federal Reserve.
Ukraine exported just 280,000 tons of grain in the first 12 days of August, with its three major ports essentially closed for business with ships unwilling to risk approaching them. That total includes 175,000 metric tons of wheat, along with 37,000 tons of barley and 68,000 tons of corn. Ukraine exports thus far this month are a fraction of what they normally would be during this seasonally busy time when exporters typically rush to push wheat out the door ahead of the approaching corn harvest. That export pace is expected to ramp up in the months ahead as Ukraine jumpstarts its land export program once again, like it did in 2022. It will take time to reroute rail and truck shipments and ramp up the rail transition program at the border once again. Ukraine’s rail doesn’t match up with Europe’s rail width, so a switch needs to occur at the border. Furthermore, Ukraine is trying to ramp up land exports into Europe at a time when European farmers are harvesting their own crops, limiting space and raising resistance to those imports. Russia has its own set of problems after Ukraine inflicted significant damage to Russia’s main Black Sea port at Novo yesterday. It’s too soon to say that Russia’s Black Sea exports are shut down, but they have been dramatically reduced, with its next best option being a costly rail shipment to either the Baltic or to its Eastern ports.
Yesterday’s USDA WASDE crop report was released in the context of the above developing story. USDA’s corn and soybean yields came in below expectations, largely offset by increases in planted acreage. But the market focused on lower yields and rising demand. It’s that demand story that I believe will garner more attention as we go through the next several months. In light of the above, USDA only cut Russian and Ukraine wheat exports by a combined 2.5 million metric tons, which could end up being a fraction of the eventual result. It cut Ukraine corn exports by 1 mmt, which again is likely just a starting place. U.S. wheat supplies are at the bottom of the list of alternative supplies, but that doesn’t mean that we can’t eventually benefit. On the other hand, U.S. corn supplies are much closer to the top of the list for alternative supplies. Add in a strong biofuel program, domestically and globally, and China’s soybean buying program, and you have the ingredients for a strong demand focus. We’re still going to face our ups and downs, but it’s been a while since we’ve experienced a demand-driven market.
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A strong super El Niño has started, but the crop damage that would lift food prices is still expected to land between September and December. Indian wheat area and Southeast Asian palm oil production sit at the front of the transmission chain, with Brazil the larger unresolved question.
Damage to Black Sea ports has stalled grain exports, but the more serious risk is now forming on the farm. Collapsed farmgate prices and a Russian fuel crisis have put part of the wheat harvest in question.
August 13 – The major stock indices traded quietly mixed overnight ahead of this morning’s weekly job numbers and producer price index data. Like Wednesday, this morning’s data was considered good as well, providing support for stocks while generally allowing Treasury yields to slip a bit lower. The VIX is trading near 14.4, which is just above yesterday’s new low for the year. The dollar index is trading near 99.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.15%. WTI crude oil is trading near $81 per barrel, while Brent trades near $87 per barrel. Wheat prices again firmed overnight on geopolitical risks in the Black Sea Region, while corn and soybean prices pulled back modestly from yesterday’s big gains.
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