Today's Perspective Video: Tariffs, Trade & Crops: How Geopolitics Are Shaping Commodity Markets
July 15 – Stock futures were mixed to firmer overnight ahead of this morning’s inflation data, with both the S&P 500 and Nasdaq stock indices flirting with new record highs. The VIX traded below 17, while the dollar index traded near 98.0. Yields on 10-year Treasuries are trading near 4.41%, while yields on 2-year Treasuries are trading near 3.91%. Crude oil prices were mixed, while the grain and oilseed markets were mostly lower in light trade volume.
The consumer price index rose 0.3% on the month in June, matching analyst expectations, but up from just 0.1% the previous month. The headline CPI rose 2.7% year-on-year in June, up from expectations of 2.6%, and above the 2.4% seen the previous month. Core inflation that excludes the more volatile food and energy sectors rose 0.2% month-on-month in June, down from analyst expectations of 0.3%, but up from 0.1% in May. The core CPI rose 2.9% year-on-year in June, matching analyst expectations, but up slightly from 2.8% in May. Higher energy prices were clearly the leader of inflationary pressures in June, as geopolitical tensions in the Middle East escalated at the time. Energy commodities were up 1.0% on the month in June, while fuel oil prices rose 1.3%. Electricity prices also rose 1.0% on the month, while natural gas prices rose 0.5%, and gasoline rose 1.0% from May. However, used car and truck prices fell 0.7% on the month in June, while new car prices fell by 0.3%. Shelter prices rose by “just” 0.2% on the month, as inflationary pressures there continue to ease.
The bottom line is that Wall Street gave a sigh of relief initially on seeing these numbers, as it continued to indicate that President Trump’s tariff war still has not caused inflation to explode higher. Energy prices rose as expected, as the war between Iran and Israel heated up in June, but core inflation remained relatively stable. Yes, inflationary pressures are slowly rising again, which will make the Federal Reserve reluctant to cut its benchmark interest rate. But the increase in inflation, while frustrating, still remains well below consumer and industry fear levels.
The Empire State manufacturing index, produced by the New York Federal Reserve, rose to 5.5 for July, up from a negative 16 in June, and above analyst expectations of -10. In fact, it came in well above the most optimistic analyst estimate. A number above zero indicates month-on-month growth for the index, while the opposite is also true. Both new orders and shipments edged higher in June, while delivery times lengthened and supply availability declined. Inventories were significantly higher, but employment expanded for the second consecutive month, with the average workweek increasing. Input price increases picked up the pace, while selling price increases were steady. Capital spending plans grew in June, as firms remained “fairly optimistic about the outlook.”
China reported solid GDP growth for the second quarter at an annualized rate of 5.2%. That’s a bit lower than the 5.4% reported for the first quarter, but it gives a 5.3% rate for the first half of the year. That means that China can have a slowdown in the second half and still hit its 5.0% goal. The government reports that consumer spending drove 52% of the GDP growth in the second quarter, following 51.7% in the first quarter. Exports were the second largest contributor to the solid reported GDP pace at 31.2%, although that’s down from 39.5% in the first quarter. I remain skeptical of these government GDP numbers, and here are some of the numbers that drive my skepticism. Historically, we see a strong correlation between GDP and electricity output, but that increased by just 1.7% in June, and it rose by just 0.8% in the first half of the year. China’s property market is also one of the core components of its economy and it continued to depreciate in June, with new home prices falling another 0.3% on the month in June, after falling 0.2% in May. Nearly all 70 Chinese cities that track housing prices saw growing downside pressures on home prices in June as the property meltdown continues. China did see retail sales up by 4.8% year-on-year in June, but that was largely driven by China’s massive stimulus program that subsidizes purchases of certain consumer items. Those items are moving, while non-subsidized items are not. This subsidy program continues to drive China’s fiscal debt levels to new highs, when added on top of all of its other stimulus measures.
The U.S. corn crop is rated at 74% Good to Excellent this week, steady with the previous week, and 9 points ahead of the five-year average for the week. The soybean crop is rated 70% Good to Excellent this week, up from 66% the previous week, and 8 points above the five-year average for this week. This is the time of year when crop ratings tend to trend lower, but instead they continue to be steady to higher, pushing yield models higher as well. My corn yield model is currently at 187, with soybeans at 54 bushels per acre. Remember, that’s a snapshot of yield potential in mid-July. A lot can change over the next 6 to 8 weeks, but it’s pretty impressive for mid-July. I continue to get more reports of puzzling pollination issues in this year’s crop that would not show up in the crop ratings. It’s too early to know the scope of the impact that they will have on the national yield, if any, but it warrants monitoring.
