June 11 – An agreement with China and inflation – or the lack thereof – are the focus on Wall Street this morning, with stock futures firming on the above, while Treasury yields fell. The VIX slipped closer to 16 this morning, posting a fresh three-month low in the process, while the dollar index traded near 98.7. Yields on 10-year Treasuries are trading lower near 4.44%, while yields on 2-year Treasuries are trading near 3.95%. Crude oil prices pushed above $66 per barrel to post fresh two-month highs, while the grain and oilseed markets found support from the China agreement as well.
The consumer price index rose just 0.1% on the month in May, down from analyst expectations that it would remain at 0.2% monthly growth as it had been in April. The headline CPI rose 2.4% year-on-year in May, down from analyst expectations that it would rise to 2.5%, up from 2.3% in April. Core CPI that excludes the volatile food and energy segments also rose by just 0.1% on the month in May, down from analyst expectations that it would rise to 0.3% on the tariffs, and down from 0.2% growth in April. The core CPI rose 2.8% year-on-year in May, matching the previous month’s pace, but down from analyst expectations of 2.9%.
Energy prices fell 1.0% on the month in May, leaving them down 3.5% on the year. Gasoline prices fell 2.6% on the month and 12.0% on the year. Fuel oil prices rose 0.9% on the month, but they remain down 8.6% on the year. Electricity prices rose 0.9% on the month, while being up 4.5% on the year. Natural gas prices dropped 1.0% on the month, but they are still up 15.3% on the year. Both new and old vehicle prices fell in May, by 0.3% and 0.5% respectively, while apparel prices dropped 0.4%. Shelter costs rose 0.3%, but transportation services dropped by 0.2%. Overall, today’s inflation numbers are a win for the Trump Administration. That doesn’t mean that we won’t see tariff-related inflation show up in the hard data in the months ahead, but this buys President Trump more time. Wall Street likes the lower inflation numbers, as it believes that they will lead to lower interest rates down the road. That helps regain the confidence of the consumer, when the consumer sees their 401K performing well. The consumer is also the voter, influencing members of Congress. Trump needs the support of members of Congress in order to continue to use his tariffs as a leverage tool to get concessions from our trading partners surpassing two-thirds of the 90-day suspension of reciprocal tariffs to allow for the negotiations.
China and the United States appear to once again have an agreement after another set of high-level trade talks. I mentioned yesterday how the differences between the two countries are vast – probably wider now than they were two months ago. Yet, they are establishing a pattern of finding areas to agree on each time they have high-level talks. The details of the current agreement are just coming out, but President Trump’s post on social media suggests that U.S. tariffs on China roll back to 55%, while China gets 10%. Of course, that 10% is likely on top of all of the other tariffs that China continues to charge. The 55% charged by the United States includes Trump’s baseline 10% reciprocal tariff, along with a 20% tariff for fentanyl trafficking and a 25% tariff reflecting pre-existing tariffs. The agreement apparently includes guarantees that China will supply magnets and rare earth minerals to the United States, while we loosen restrictions on technology that we export, and allow Chinese students to enroll in our colleges and universities. The latter had received increased scrutiny after a total of three Chinese nationals were arrested over the past two weeks while trying to smuggle biologicals that could have been used for agroterrorism into the United States via the University of Michigan. The agreement is still subject to final approval from both Trump and Chinese President Xi Jinping.
Crude oil prices added to this week’s two-month highs on the above, while grain and oilseed prices did the same. Both stand to benefit from a stronger Chinese economy that increases demand for commodities. Ag commodities have thus far received little public attention in the negotiations with China, nor have we heard much about Chinese imports of U.S. energy. I still believe that we could eventually see a broader agreement that includes China’s commitment to purchase more raw commodities from the United States in exchange for favorable tariff treatment in accessing the vast U.S. consumer market. Such an agreement would help both economies while working toward reducing China’s huge trade surplus that it uses to fuel economic and military expansion – containing China. I would expect such an agreement to take considerably more time to work out, and to only last as long as President Trump is in office. It would then be up to his successor to either allow the agreement to expire, or to pursue its extension. In the meantime, look for the negotiation cycle to continue. Things will likely go quiet for a short period, we’ll hear more exchanges of criticism that will result in another round of talks, in which both sides will focus on some segment of their differences on which they can make an agreement – incrementally working toward a broader agreement.
