August 14 – We received a second dose of inflation data this morning, with Wall Street again seeing the positive in the data to support its notion that the Federal Reserve will be aggressive with rate cuts the rest of the year, although it did dial back those expectations a bit this morning, moving toward 3 rate cuts by year’s end instead of 4. The VIX is trading near 17 this morning, while the dollar index is trading near 102.4. Yields on 10-year Treasuries are trading near 3.86%, while yields on 2-year Treasuries are trading near 3.98%. Crude oil prices are mixed to higher at this hour, while the grain and oilseed markets are mixed to weaker.
The consumer price index rose 0.2% month-on-month in July, which is a notable turnaround from the -0.1% posted for June, although today’s number matched analyst expectations. The headline CPI rose 2.9% year-on-year in July, down from 3.0% the previous month, down from analyst expectations of 3.0%, and the first time that the headline number has been below 3.0% since March 2021 – 40 months. Core CPI that excludes the food and energy sectors rose 0.2% month-on-month in July, up from 0.1% in June, but matching analyst expectations. Core CPI rose 3.2% year-on-year in July, down from 3.3% the previous month, but again matching analyst expectations. So, the bottom line is that we saw a month-on-month increase in inflation at the consumer level in July, while the year-on-year numbers slipped lower, and the month-on-month changes were not surprises. Treasury yields initially popped and stock futures fell on the data release as the Algos read the numbers, but then human trading focused more on the silver lining of the report that there were no notable surprises in the primary numbers.
Breaking down the numbers, used cars and trucks fell another 2.3% month-on-month in July, and they are now down 10.9% year-on-year. Commodity prices in general are weaker, although energy commodities were up 0.1% on the month, while still being down 2.0% on the year. New vehicle prices continue to erode lower, while now being down 1.0% year-on-year. But transportation services are again on the rise after two months of pulling back; up 0.4% on the month and up 8.8% year-on-year. One of the biggest drivers of increases in this area is escalating car insurance rates due to the rapid rise in car thefts in states with bail reform laws in place. Shelter costs have also accelerated again, up 0.4% month-on-month and up 5.1% year-on-year. Last week’s collapse in Treasury yields did more to stimulate that demand, which is expected to show up in future reports. So, some of the seeds of inflation that I’ve previously discussed are still present.
Yields on 10-year Treasuries bottomed out just below 3.67%, down roughly 50 basis points from the previous week, and down nearly 100 basis points from the spring high. That triggered activity in the mortgage market as expected. Consumer confidence was still shaken last week, so new mortgage applications only rose 2.8% week-on-week for the week ending August 9th. But consumers did jump at the chance to refinance existing loans, with applications jumping by more than 34% week-on-week. Refinancing at a lower rate puts more disposable income in the pockets of consumers, which tends to increase demand for goods and services when/if consumer confidence is restored. That remains the key going forward. Did last week’s stock market rout do long-term harm to consumer confidence, or was the selloff on Wall Street short enough in duration that consumer confidence is quickly being restored? That will prove to be a key indicator of where we go from here.
China’s CSI 300 stock index posted fresh six-month lows today as traders fear more bad news about that country’s economy. Weaker-than-expected credit data on Tuesday set the tone, with additional data on home prices, fixed asset investments, and retail sales expected later this week. Demand for consumer loans continues to under-perform, reflecting a lack of consumer confidence in the economy. Money supply available to the consumer continues to trend lower at a historic pace. It now appears likely that the U.S. Federal Reserve will start cutting interest rates next month, giving China more room to stimulate its economy, but will it again be too little too late? I am not in the camp of those calling for a collapse of China’s economy – not yet. I still believe that its leaders have more tools in the toolbox to utilize, but they want to see the Fed move into a more dovish monetary policy before utilizing those tools. Besides, the controlled message within China is largely that it’s problems are the fault of the West as Europe and the United States post trade barriers against it.
The way of mankind is to create enemies outside your border for people to focus on when problems are mounting at home. Along that line, it’s interesting to note that China has been aggressively importing soybeans from Brazil over the past six months, but it has very little coverage in place for the October to January timeframe when it historically has depended heavily on U.S. supplies. I anticipate that we will see it become more aggressive on this current price break, but that imports of U.S. soybeans will continue to decline as it builds increasing dependency on Brazilian supplies year-on-year.
