July 13 – Wall Street takes courage from inflation data, but it remains concerned about the tight jobs market. Nonetheless, stock futures have a firmer tone to them in early trade today. The VIX is trading near 13, reflecting a growing confidence on Wall Street. The dollar index fell to a fresh 14-month low near 100.1. Yields on 10-year Treasuries are trading near 3.81%, while yields on 2-year Treasuries are trading near 4.65%. Crude oil prices pulled back modestly from yesterday’s two-month highs, while the grain and oilseed markets bounced modestly from Wednesday’s big post-report sell-off that followed a bearishly construed USDA crop report.
The producer price index rose just 0.1% month-on-month in June, down from analyst expectations of 0.2% growth, but a rebound from the 0.3% contraction seen in May. The PPI rose just 0.1% year-on-year in June, down from analyst expectations of 0.5% and down significantly from the 1.1% year-on-year growth seen in May. Core PPI that excludes the food and energy sectors was also up just 0.1% month-on-month, down from analyst expectations of 0.2% and down from 0.2% growth the previous month. Core PPI was up 2.4% year-on-year in June, down from analyst expectations of 2.8%, and down from the 2.8% posted in May. These are good numbers, suggesting decreasing inflationary pressures at the wholesale level, and consistent with yesterday’s CPI numbers.
But that wasn’t the case with the weekly jobless claims data. First-time claims for unemployment benefits fell to just 237K in the week ending July 8, down from 249K the previous week, and below analyst expectations that they would stay at 249K for the week. This allowed the four-week moving average to fall to 246.75K claims, down from 253.5K claims the previous week. Continuing claims rose by 11K to 1.720 million in the week ending July 1 – this data is delayed by an additional week. However, the four-week moving average for continuing claims fell by 10,750 to 1.735 million. This is still a relatively low number. As such, these numbers create concern for the Federal Reserve in the context of the monthly jobs data released on July 7 that show a tightening jobs market. Wage inflation still presents a challenge to the Federal Reserve in closing that final gap between 3% headline inflation and the Fed’s 2% mandate. Fed fund futures currently put 92% odds of another 25-basis-point rate hike later this month, but they only put 22% odds on another rate hike beyond that currently, with rates expected to start falling again at some point in the first quarter of next year. The market’s been wrong about that for the past year-and-a-half, and I’m going to stick with that until I see signs from the Fed that it’s ready to change its view of things. The Fed currently puts emphasis on wage inflation as being the primary obstacle to hitting the 2% mandate and pivoting now would only be expected to further aggravate that problem.
China imported 10.3 million metric tons of soybeans in June, up 24.5% from the previous year’s pace, marking the second consecutive month of strong imports that exceeded crush demand. This pattern of importing 2 – 3 mmt of soybeans above crush demand monthly is expected to continue for the next several months, based on loading and shipping schedules, as China loads up on cheap Brazilian soybeans. Year-to-date soybean imports total 52.6 mmt, up 13.6% from the previous year. Surplus shipments from May forward are expected to exceed crush demand by at least 12 mmt, reducing China’s need to import from the United States if it so chooses to do so this fall. We do not know China’s intentions regarding that choice, but we do know that total new-crop soybean bookings to all destinations total just 153 million bushels to date, which is roughly half where we’d expect it to be in early July, with China currently accounting for just 63 million bushels of that total. Chinese purchases of new-crop soybeans should be much stronger by this point.
The two biggest take-aways from yesterday’s USDA WASDE report was that the wheat crop was much bigger than the trade expected, and USDA made an anticipated bullish new-crop soybean balance sheet bearish. I still believe that we’ll see hard red winter wheat harvested acres adjusted lower again by September, but that matters less to the market right now than the weak export demand. That overshadows everything else, including the anticipated end of the Ukraine grain initiative. As for soybeans, new-crop ending stocks still fell from 350 million down to 300 million bushels, with USDA holding the line on its 52-bushel yield. I don’t know where this year’s yield will end up, but the former agronomist in me remains more concerned about the lack of improvement in the soybean crop than I do in the improvement in the corn crop. It’s hard to be bullish soybeans with a 300-million-bushel carryout, but traders may also be reluctant to be bearish until they see how this year’s crop develops. Very weak South American new-crop basis is doing little to expand acres for Brazil’s next crop as well. Corn on the other hand is a different story, with yield prospects improving and demand prospects softening. New-crop export sales are a fraction of where they should be in early July, and Brazil is overwhelmed with corn supplies as the harvest comes in, pushing basis lower, making it difficult for the U.S. to compete on the world market at a time when feed demand may struggle in the year ahead with fewer cattle and hogs on feed. That feed demand may erode further when cattlemen start holding back heifers to rebuild the breeding herd this next year.
