By: Arlan Suderman, Chief Commodities Economist
July 29 – Stock futures traded steady to firm ahead of this morning’s inflation data, and as we head into the final day of the trading month. The VIX traded to fresh three-month lows below 22 this morning on easing fears on Wall Street. Yet, it is the final trading day of the month, which may lead to some erratic movement at time. The dollar index fell to a fresh three-week low near 105.5 earlier today, although it has firmed off that level currently. Yields on 10-year Treasuries are trading near 2.70%. The broader commodity sector found good support once again overnight, as it has for much of this week. Crude oil prices are 3% higher, while the grain sector was generally 2% higher on strengthening weather concerns for the Midwest.
The Federal Reserve prefers to focus on inflation data from the Personal Consumption Expenditures report, which was released earlier this morning. It showed that personal income rose 0.6% month-on-month in June, matching the upwardly revised May numbers, but up from analyst expectations of an 0.5% increase. Personal consumption expenditures were up 1.1% month-on-month in June, up from 0.3% in May and above analyst expectations of 0.9%. The PCE price index rose 1.0% month-on-month in June, up from 0.6% in May, and above analyst expectations of 0.9%. The PCE price index was up 6.8% year-on-year in June, up from 6.3% the previous month and above analyst expectations of 6.7%. The core PCE price index that excludes food and energy prices rose 0.6% month-on-month, which was double the previous month’s pace, and above analyst expectations of 0.5%. The core PCE price index was up 4.8% year-on-year in June, up from analyst expectations that it would remain unchanged at 4.7%.
The bottom line is that inflation continues to be hotter than expected. Personal spending also remains strong. That is boosted by the fact that everything costs more, especially energy in June, but it also suggests that consumers are not dramatically cutting back as one would expect in a recession. There’s still a lot of money in the system, thanks to two plus years of stimulus injections into the economy. Currency in circulation remains near $2.3 trillion, up from $1.8 trillion prior to the pandemic. M2 money supply is at $21.7 trillion, down about $72 billion from March, but still up notably from pre-pandemic levels near $15.5 trillion. The Fed has started to extract that money from the system as it shrinks balance sheet, but that will take time. This is why the Fed remains aggressive with rate hikes. It still needs to get its benchmark rate above the rate of inflation. The July inflation numbers are expected to be notably better, due to the collapse in commodity prices that started in the last half of June. But the systemic problems that supported high prices are still present, suggesting that it would be presumptuous to say that we’ve defeated inflation. It’s still very much with us, with crude oil prices stabilizing near $100 per barrel, and many of the food-based commodities on the rise once again.
The first cargo of grain may leave Ukraine’s port at Chornomorsk as early as today, according to UN Deputy Secretary General Martin Griffiths. Another two weeks are required to get things ready for moving grain out of the larger port of Odessa, according to Ukrainian authorities, with Pivdennyi after that. Ukraine says that 17 ships are currently loaded with grain and ready to move under the recently signed agreement to allow safe passage. The first contracts with London insurers were signed on Wednesday to allow movement of the ships. Reports indicate that the contracts were signed by a number of Lloyd’s syndicates who have pooled capital in assuming insurance risks. Insurance costs were not reported, although I noted in my midday commentary yesterday that some rates had been reported to be as much as 5% of the cost of the vessel. Ukraine reports that it exported 1.4 million metric tons of grain over land thus far this month, including 325K tonnes of wheat, 131K tonnes of barley and 941K tonnes of corn. The spring harvest is roughly 30% complete at this point and continuing to advance.
Forecast models continue to show a strong high-pressure ridge beginning to build in the Central Plains next week, with its influence stretching east across much of the Midwest. Some showers are expected to develop as a weak cold front drifts across the crop belt next week while the high begins to build, but rainfall totals are expected to be relatively light. Intense heat is expected to focus on Iowa and surrounding areas by mid-week, including triple-digit readings during the day, with overnight lows in the mid- to upper 70s. That is not good for corn grain fill, nor is it good for holding onto and filling soybean pods. It would be presumptuous to say this will lead to a crop failure. I simply do not see that at this point. In fact, we could see the high temporarily retrograde a bit after the first week to allow temperatures to moderate with rain chances in central and eastern portions of the Midwest. But it does provide further evidence that trend yields will be difficult to achieve in a year when they are essential to sustain the balance sheets for corn and soybeans. By no means are we looking at a repeat of 2012. That year was very different than the current one. But the opportunity is there for corn and soybean yields to fall notably below trend levels. That is not expected to show up to any significance in the August production estimates, but it would be expected to start being reflected in the September estimates.
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A strong super El Niño has started, but the crop damage that would lift food prices is still expected to land between September and December. Indian wheat area and Southeast Asian palm oil production sit at the front of the transmission chain, with Brazil the larger unresolved question.
Damage to Black Sea ports has stalled grain exports, but the more serious risk is now forming on the farm. Collapsed farmgate prices and a Russian fuel crisis have put part of the wheat harvest in question.
August 13 – The major stock indices traded quietly mixed overnight ahead of this morning’s weekly job numbers and producer price index data. Like Wednesday, this morning’s data was considered good as well, providing support for stocks while generally allowing Treasury yields to slip a bit lower. The VIX is trading near 14.4, which is just above yesterday’s new low for the year. The dollar index is trading near 99.8. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.15%. WTI crude oil is trading near $81 per barrel, while Brent trades near $87 per barrel. Wheat prices again firmed overnight on geopolitical risks in the Black Sea Region, while corn and soybean prices pulled back modestly from yesterday’s big gains.
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