June 13 – Wall Street digested more inflation and job numbers this morning in the wake of yesterday’s monetary policy statement from the Federal Reserve. Stock futures rallied on this morning’s data, but then largely went back to trading where they were before the data release, as it wasn’t expected to materially change what the Fed said on Wednesday. The VIX is still trading at very low levels near 12 this morning, while the dollar index is trading near 104.8. Yields on 10-year Treasuries are trading near 4.28% after briefly probing to fresh two-month lows this morning, while yields on 2-year Treasuries are trading near 4.71% after doing the same. Crude oil prices are modestly higher this morning, while the grain and oilseed sector is mixed to higher as well.
The headline producer price index dropped 0.2% month-on-month in May, reflecting a bit of deflation during the month. That compares to 0.5% month-on-month growth in April, and to analyst expectations of 0.1% growth. The headline PPI rose 2.2% year-on-year in May, matching the previous month’s pace, but below analyst expectations that it would rise to 2.5%. The core PPI that excludes the more volatile food and energy sectors was flat month-on-month in May, compared to 0.5% growth in April, and compared to analyst expectations of 0.3%. The core PPI rose 2.3% year-on-year in May, down from analyst expectations that it would remain at 2.4%. Like yesterday’s consumer price data, a decline in energy prices of 4.8% month-on-month, and a decline in transportation and warehousing of 1.4% month-on-month were the primary factors pulling the overall numbers lower in May.
First-time claims for jobless benefits rose to 247K in the week ending June 8, up from 229K the previous week, and above analyst expectations of 222K claims. The four-week moving average rose to 227K claims, up from 222.25K the previous week. Continuing claims for the week ending June 1 jumped by 30,000 to 1.820 million, while the four-week moving average rose by 8,500 to 1.797 million. All of these numbers remain relatively low, but the unexpected upturn is significant, and it needs to be watched to see if it is more of an aberration or the beginning of the loosening of the jobs market.
But yesterday’s Fed statement is the main topic of conversation today. The Fed made no change to its base rate, as expected, but it otherwise leaned more hawkish than Wall Street would prefer. The famous dot plot graphic shifted rate cuts later in the calendar, with just one cut late this year, followed by four more next year. This continued pattern of delaying anticipated rate cuts comes amid disappointment in the progress toward dragging inflation down to the 2% mandated level. Wednesday’s comments from the Fed indicate that policymakers feel no need to cut rates as long as we remain well above the 2% mandate, and therefore they are indeed willing to be patient to allow current policy to work. The dot plot graphic reveals that 11 of the 19 members of the Federal Open Market Committee anticipate either one or none rate cuts this year, suggesting that the December meeting is the most likely timing of that rate cut if it happens at all. Fed member expectations in 2025 vary widely, suggesting that they anticipate that they’ll be able to cut rates at some point, but they really don’t have a high degree of confidence on the timing of said cuts. Fed Chair Jerome Powell’s comments suggested that it would likely take a sudden deterioration of the jobs market to trigger significant cuts. Meanwhile, the Fed raised its inflation expectations for the year, with the core PCE rate expected to be near 2.8% at the end of this year, not falling to 2% until 2026. This Fed has clearly stated many times that it would rather error on being too late with rate cuts than to repeat its mistake from 1980 when it cut too soon, and the economic data currently gives it no reason to abandon that position.
USDA’s monthly WASDE crop report held few surprises on Wednesday, although the few surprises that were there do hold some significance. First, it’s noteworthy that USDA cut 1.5 million metric tons off Ukraine’s wheat crop, which is a good number at 19.5 mmt. It also cut another 5 mmt off Russia’s crop, bringing it down to 83 mmt. Local estimates are lower, but that’s a significant acknowledgement by USDA. Recent rains over-performed in southern Russia, cutting the area under stress to a quarter of the belt, so now we wait for harvest results. USDA cut 1 mmt from Brazil’s soybean crop noting flood losses in Rio Grande do Sul, and we’ll likely see those losses mount a bit higher as the data comes in. However, it made no changes to Brazil’s corn crop, with current indications that yield potential may be a bit better than feared in dry areas of Mato Grosso do Sul and Parana, and it made no changes to Argentina’s corn and soybean crops. That didn’t surprise me for Argentina’s soybean crop, which is basically already harvested, but I was surprised that we didn’t see a cut in Argentina’s corn crop. Local estimates are in the mid-40s mmt range, while USDA is at 53 mmt, with roughly a third of the crop harvested. The best yields were expected early this year. Argentina’s final corn production number will impact whether USDA needs to raise or cut its U.S. export target for the 2024-25 marketing year. Meanwhile, the Midwest will heat up over the coming week.
