August 30 – Overnight gains were pared by this morning’s personal consumption report, as we head into a three-day holiday weekend. The U.S. markets will largely be closed on Monday for the Labor Day holiday, before reopening for a shortened week of activity ahead of the highly anticipated monthly jobs report next Friday. The VIX is trading nearly 15 this morning, while the dollar index is modestly higher near 101.6, breaking its recent streak of lower weeks that took it to one-year lows. Yields on 10-year Treasuries are trading near 3.87% after rallying on this morning’s PCE report, while yields on 2-year Treasuries are trading near 3.92%, as the spread inversion continues to consolidate. Crude oil prices are 2% lower this morning after failing to sustain a rally overnight, while the grain and oilseed complex is mostly higher on signs that it is trying to carve out an early harvest low – with traders perhaps feeling that the recent decline in prices took them “low enough.” Ultimately though, that will likely hinge on whether this year’s fall crops are still getting bigger or not, and on whether current price levels will be able to generate sufficient demand to absorb these big crops that will struggle to find enough storage.
Personal income rose 0.3% month-on-month in July, up from 0.2% in June, and above analyst expectations of 0.2%. Personal consumption expenditures were up 0.5% month-on-month, up from 0.3% the previous month, but matching analyst expectations. The headline PCE price index rose 0.2% month-on-month in July, up from 0.1% the previous month, but matching analyst expectations. The headline PCE price index rose 2.5% year-on-year, matching both the previous month and analyst expectations. The core PCE price index that excludes the more volatile food and energy sectors rose 0.2% month-on-month in July, matching both the previous month and analyst expectations. The core PCE price index rose 2.6% year-on-year in July, matching the previous month, but falling just below analyst expectations of 2.7%.
The bottom line seen by the markets in the above is that inflation remains steady. No inflation number in the above data was below the previous month. In fact the headline inflation number ticked up a bit month-on-month in July. But the market looked at today’s inflation numbers through the filter of statements made by Federal Reserve Chair Jerome Powell at last week’s Jackson Hole Economic Symposium. Essentially, traders heard him say that inflation is low enough that they’re not focused on it anymore, so therefore there really wasn’t anything in the inflation data to move the market significantly.
But the markets are focused on the scope of anticipated rate cuts, and that puts the focus on the jobs market and on the strength of the overall economy. Consumer spending accounts for more than two-thirds of our economy. Consumer spending rose a solid 0.5% month-on-month in July, suggesting that the strength seen in the 2nd quarter GDP growth of 3.0% carried over into the first month of the next quarter as well. Furthermore, personal income came in stronger than expected at 0.3% growth, also reflecting strength in the economy. Those numbers argue against the 50-basis point rate cut hoped for by many in the markets, and justifiably so. I believe that a 50-basis point rate cut next month would send the wrong message to Wall Street, and to the consumer. We already saw data yesterday showing that consumers are holding back on buying houses now because they’re convinced by the headlines that mortgage rates are going notably lower. That’s another case where the Fed’s commitment to transparency is likely doing more harm than good. This week’s data showed rising consumer confidence, but thanks to Fed transparency, they’re holding off spending on big ticket items because they believe it will be cheaper later.
Nonetheless, the Fed is still expected to cut its benchmark rate by 25 basis points next month, with Wall Street anticipating more cuts to follow in the meetings to follow until the Fed returns its rate to what is considered to be the economy’s “natural” rate. That has apparently given the People’s Bank of China the greenlight to step up stimulus of the Chinese economy, resulting in a jump in its stock market, and a surge in the value of the yuan to close the week. The PBOC bought 400 billion yuan ($56.3 billion) in government bonds on Thursday, which should give it better control and flexibility in managing yields. The increased liquidity could encouraging more buying in the weeks ahead, although we’ll likely need to see more fundamental changes to bring back consumer confidence.
Were sub-$4.00 corn and sub-$10.00 soybean futures enough to price in this year’s large crops – low enough to create sufficient demand to absorb the surplus bushels? The market is behaving like it thinks that is the case, although we are far from confirming that to be the case. For that, the market must be comfortable that we know the size of this year’s crops, and that likely won’t be the case before at least the September crop report. The market must also brace for harvest grain movement as storage facilities exceed capacity over the next 60 – 90 days.
