December 22 – Call it a transition day today, as traders quickly set their positions before leaving town for the Christmas break. But first, they dealt with the release of key economic data that was released this morning. Stocks are mixed following that data dump this morning, with the strength in the tech sector. The VIX is trading near 14, while the dollar index trades near 101.6, representing nearly five-month lows for the greenback. Yields on 10-year Treasuries are trading near 3.86%, which is just above five-month lows, while yields on 2-year Treasuries are trading near 4.32%, which is just above seven-month lows. Wall Street likes those low interest rates, which are ironically working against the Federal Reserve’s efforts to bring inflation down to the 2% mandate level. Crude oil prices are nearly 1% higher this morning, while the grain and oilseed sector was modestly higher across the board as well. The markets will be closed on Monday for Christmas, and again the following Monday for New Year’s Day. The four trading days in-between are expected to be lighter volume slow news days. As such, I’ll be monitoring market activity on those days, and I will write commentary as warranted, but otherwise focus on spending time with family, with no commentary scheduled for next week. My full commentary publishing schedule will return on January 2nd.
Durable goods orders rose a robust 5.4% month-on-month in November, which more than doubled the average trade guess of 2.4%, and it contrasts sharply with the 5.1% contraction seen in October – and that number was revised upward as well. The headline number was biased by transportation orders, so let’s take them out. Durable goods orders minus transportation orders rose 0.5% month-on-month in November, which was notably higher than the 0.2% expected by analysts, and a contrast to the downwardly revised 0.3% contraction seen in October. Core capital goods orders, which are a measure of business sentiment, rose a solid 0.8% month-on-month in November, up from trade expectations of 0.1% growth, and certainly better than the downwardly revised 0.6% contraction seen in November. This data suggests solid economic growth in November.
Personal income rose 0.4% month-on-month in November, matching analyst expectations, and above the upwardly revised October reading of 0.3%. Personal consumption expenditures rose 0.2% month-on-month in November, down from analyst expectations of 0.3% growth, but up from 0.1% growth the previous month. The PCE price index contracted 0.1% month-on-month in November, again matching analyst expectations, after being flat in October. This headline number would suggest that we’ve won the battle with inflation, although it still remains up 2.6% year-on-year. That’s down from analyst expectations of 2.9%, and below 2.9% the previous month. The core PCE price index that excludes the more volatile food and energy prices rose 0.1% month-on-month in November, below analyst expectations of 0.2%, but matching the previous month’s pace. The core PCE price index was up 3.2% year-on-year in November, versus analyst expectations of 3.4%, which was also the October pace. Initially,
Treasury yields rallied on the durable goods data, but they fell again on the inflation data. The markets are pricing in better than 80% odds of our first Fed rate cut by March, with expectations that we’ll see up to 150 basis points of cuts by the end of 2024. I still disagree with that, but it does explain the strength that we’ve seen in equities in recent weeks. The bottom line is that we are now seeing deflation in the goods sector, with inflation still well entrenched in the service/shelter sector. That inflation is most obvious in shelter and labor costs. Those are areas that the Federal Reserve has previous stated were a priority for it. We’ve seen the markets direct more money into the equites on this outlook, whether it’s right or not. The question for 2024 is, when/if we’ll see that translate into positive money flow for the commodities?
Showers are expected to continue to expand across Argentina’s grain belt into early January, supporting strong crop growth with good yield potential. But it remains a bit messier to the north in Brazil, where the picture is less clear. We’ve seen several production estimates emerge from Brazil this week, generally ranging from 150 to 160 million metric tons. That’s quite a range, reflecting different perceptions about the crop. Brazil is a big country, lacking good weekly crop ratings supported by the government as we have here in the States. That leads to some of the confusion, but it’s another reason why I like the StoneX Brazil customer survey production estimates, which reflects what the farmers across Brazil think. The survey will be updated on January 2nd. I suspect that we’ll see the December estimate of 161.9 mmt come down, but I still don’t see anything to suggest that it will come down enough to suggest that U.S. supplies need to be rationed with higher prices. Perhaps that will change by January 2nd, but I still have not been able to find such evidence thus far. That said, we are in a critical pod fill stage currently for much of the crop, meaning that those areas of Center-West Brazil that do receive good rains will benefit immensely, while those that miss out on the rains could see notable crop losses. Commodity Weather Group continues to believe that up to a quarter of the soybean belt will miss out on rains over the next 10 days, but it also believes that most remaining areas will see good rains.
