July 12 – Stocks rallied as Treasury yields fell following the release of this morning’s inflation data, creating a bit of a “risk-on” atmosphere on Wall Street in anticipation of a pivot from the Federal Reserve in the months ahead. The VIX quickly fell to fresh one-week lows, trading near 14, while the dollar index fell to fresh two-month lows, trading near 101.1 this morning. Yields on 10-year Treasuries dropped to one-week lows to trade near 3.91%, while yields on 2-year Treasuries are trading near 4.76% as the inverse starts to narrow. A spurt of buying added to gains in the broader commodity sector as the inflation data was released, reflecting optimism of a soft landing for our economy. Crude oil prices are trading 1% higher at fresh two-month highs, while the grain and oilseed sector is mostly higher as well ahead of today’s highly anticipated USDA WASDE crop report.
The consumer price index rose 0.2% month-on-month in June, up from 0.1% in May, but down from analyst expectations of 0.3%. The headline CPI was up 3.0% year-on-year in June, down from 4.0% in May, and below analyst expectations of 3.1%. Core CPI that excludes the more volatile food and energy sectors also rose 0.2% month-on-month in June, down from 0.4% in May, and below analyst expectations of 0.3%. Core CPI was up 4.8% year-on-year in June, down from 5.3% the previous month, and below analyst expectations of 5.0%.
The details always tell a better story, and today’s numbers present more reasons for optimism than what I’ve seen in the past, although they don’t totally alleviate my longer-term concerns. Today’s data reflects an 0.8% month-on-month increase in energy commodities, which includes a 1.0% rise in gasoline prices. Furthermore, we saw a 0.9% rise in electricity costs last month, but those line items were partially offset by a 1.7% month-on-month decline in piped natural gas prices. It was also notable that used car and truck prices fell 0.5% on the month, following a couple of months of big gains, while new car prices were flat on the month. More notably, shelter costs rose by “just” 0.4% on the month, reflecting a long-anticipated slowdown in inflationary pressures in that sector. Yet, this is one that we’ll need to watch amid signs that the housing sector is starting to heat up again as consumer sentiment improves, while the supply of housing remains tight. Also, services less energy services rose by just 0.3% month-on-month. The above-two sectors are still up 7.8% and 6.2% year-on-year. The service sector remains vulnerable to wage inflation pressures, with recent data showing the jobs market perhaps tightening again.
The bottom line is that these are good numbers, that Wall Street interprets as evidence that we can have a soft landing without a need for the Federal Reserve to do much more than to be patient and to allow what it has already done to work. But I still anticipate – as does the market – that we will see another 25-basis point rate hike later this month, as the Fed remains concerned about the shelter and wage portions of inflation. The current path can continue to ease headline inflation numbers a bit more, but I continue to believe that we can’t get down to the 2% mandate without inflicting more pain on the labor market, which in turn will also impact the housing sector as well. The Fed is scheduled to release its Beige Book summarizing what it sees in the economy, and used in its policy decisions, later today.
The Ukraine grain initiative expires on Monday, and the current expectation is that it will not be extended. The last two ships loaded under the initiative are on their way out via the safe corridor. Ukraine will continue to seek ways to move grain over the coming year, encouraged by how well things worked at one-point last year when Russia temporarily suspended its participation in the program. Yet, it’s first goal will be to renegotiate the agreement. Turkey expects to host talks with Russia in August, so few if any shipments are expected through the end of August. Ukraine would then seek to implement its “Plan B” of moving grain without the cooperation of Russia if those talks fail, with expected help from Turkey and the United Nations. The question facing shippers will be whether Russia will allow that to happen considering its attack on an Odessa grain terminal earlier this week?
USDA is scheduled to release its July WASDE crop report at 11 a.m. Chicago time today. Its July report is usually short on surprises, but that may not be the case today. It’s June 30 stocks and acreage report included big changes not anticipated by the trade that must now be incorporated into the balance sheets. There are several ways that USDA can do so, leaving the door open for potential surprises in how it does so. The largest impact will be seen in the ‘23/’24 balance sheet with larger corn stocks and tighter soybean stocks.
