January 14 – Inflation and retail sales data are front and center this week, starting with this morning’s producer price index data. This morning’s data sparked a rally in stock futures, with the VIX trading below 19, and the dollar index trading near 109.7. Yields on 10-year Treasuries dropped notably on the data release, before recovering, slipping from yesterday’s 14-month high above 4.80% to trade near 4.79% this morning, while yields on 2-year Treasuries trade near 4.38%. Crude oil prices are also pulling back modestly from yesterday’s five-month highs, while the grain and oilseed sector was generally mixed with a weaker tone overnight.
The headline producer price index rose 0.2% month-on-month in December, down from 0.4% in November, and down from analyst expectations of 0.3%. The headline PPI was up 3.3%, up from 3.0% the previous month, but matching analyst expectations of 3.3%. Core PPI that excludes the more volatile food and energy sectors was flat in December, versus being up 0.2% the previous month, and versus expectations that it would again rise by 0.2%. The core PPI rose 3.5% year-on-year in December, up from 3.4% the previous month, and up from analyst expectations that it would rise by 3.4%. Is the proverbial glass half full or half empty? Today’s PPI data had something for both the hawks and the doves. What matters here is that the market continues to focus on the positive, and the positive is that core inflation was flat month-on-month in December. The problem focused on energy prices, that rose 3.5% month-on-month, and the Federal Reserve generally chooses to ignore rises in energy prices, believing them to be transitory. In reality, energy costs go into nearly everything that we do, so the Fed will take notice if higher energy prices are sustained. But for now, the assumption will be that we are on the right track. The focus now shifts to tomorrow’s consumer price data, which carries more weight overall than does the PPI.
The small business optimism index, which is a product of a National Federation of Independent Businesses survey, revealed that optimism continues to soar within the small business community post-election. The index jumped to 105.1 in December, up from 101.7 in November, and up from analyst expectations of 101.3. The range of analyst expectations stretched from 99.0 – 102.0, so today’s number beat the most optimistic expectations of analysts. NFIB’s Chief Economist Bill Dunkelberg stated, “Optimism on Main Street continues to grow with the improved economic outlook following the election. Small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.” Small businesses employ roughly 59 million people, which is nearly 46% of the nation’s workforce, while creating nearly two-thirds of the new jobs offered. Small businesses account for nearly 44% of U.S. gross domestic product.
China’s Shanghai composite stock index bounced 2.5% today, while the Shenzhen composite index surged by 3.8% on evidence that China’s central bank was stepping in to support the yuan against the dollar ahead of Monday’s inauguration of U.S. President-Elect Donald Trump. China appears to be defending the yuan at 7.33 to the dollar amid fears that new tariffs from the Trump Administration could require even greater stimulus from Chinese authorities to support the economy, further weakening the yuan’s value. On a positive note, China’s trade with Belt and Road Initiative countries rose by 3.8% year-on-year in 2024, with member trade now accounting for 50.3% of total imports and exports for China, up 6.4% on the year. More than 150 countries have signed documents to join China’s Belt and Road Initiatives. China builds infrastructure projects within many of these countries, often using equipment manufactured in China, paid for with longer-term loans that then tend to obligate those countries to China. The BRI impacts three-quarters of the world’s known energy reserves, while tying together more than three-fourths of the world’s countries. It’s China’s way of elevating itself to superpower status, while winning the loyalty of these countries in its battle with the West.
The grain and oilseed rally paused overnight as producers took advantage of the January price strength. Prices began to rise over the holidays, but then they gained renewed energy when USDA shocked the trade with historic cuts to the size of last year’s corn and soybean crops. The greatest strength was seen in soybeans, where the lead March contract is now $1 above its December low – just ahead of Brazil’s massive harvest which has begun in Mato Grosso. Managed money was already long corn, believing that it had more opportunities ahead, which Friday’s report seemed to confirm. Wheat prices have largely been a follower, although much of the strength in soybeans and wheat has been more about fund short covering, with some end user coverage being added. The rally came at the perfect time to add more winter corn acres in Brazil, while buying more acres in the Midwest in the coming growing season, although it also leaves corn prices vulnerable to potential future weather stories around the world.
