March 12 – Stocks initially broke, but then rallied on the release of this morning’s consumer price index data, perhaps showing a different reaction between the Algos and the human component of the trade. The VIX traded near 15 overnight, but it then dropped toward 14 following the data release, with the dollar index trading near 103.0. Yields on 10-year Treasuries are trading near 4.14% after things settled down a bit, while yields on 2-year Treasuries are trading higher near 4.58% following an initial volatile reaction. Crude oil prices are modestly lower, while the grain and oilseed sector is mixed to weaker – the exception being soybeans that rallied modestly on this morning’s CONAB report out of Brazil that had much lower production numbers than did USDA.
The headline CPI rose 0.4% month-on-month in February, matching analyst expectations, but up from 0.3% in January. The headline CPI was up 3.2% year-on-year in February, beating analyst expectations that it would remain unchanged at 3.1%. Core CPI that excludes the more volatile food and energy sectors rose 0.4% month-on-month in February, exceeding analyst expectations of 0.3%, but matching the 0.4% seen in January. Core CPI was up 3.8% year-on-year in February, exceeding analyst expectations of 3.7%, although down a tick from the 3.9% posted in January. So, the bottom line is that we did see core inflation tick lower on a year-on-year basis in February, but inflation at the consumer level otherwise came in higher than expected for the third consecutive month in February.
Today’s inflation data puts an end to any lingering hopes that we might see a rate cut when the Federal Reserve meets next week, with Fed fund futures putting just 1% odds on such this morning, and just 10% odds of a rate cut in May. However, the market still gives 70% odds of a rate cut in June. The real key to Wall Street’s response to next week’s Fed meeting will likely be the dot plot graphic that reflects each policymaker’s expectations for rates at the end of each of the next several years. It was that dot plot graphic that excited the market in December when it showed a downturn in rate expectations going forward for the first time in the current rate cycle. The question is, will this meeting’s graphic continue to show that same expectation of lower rates, or will those expectations of lower rates moderate somewhat, based on the hotter-than-expected CPI data that we’ve seen each month since the December Fed meeting? I still believe that we need to respect the possibility that there won’t be a rate cut this year, and we can’t rule out the possibility of a rate hike. I don’t expect a hike, but it is possible. The market is still anticipating three to four rate cuts this year.
Moody’s Ratings downgraded China real estate giant Vanke to “Ba1” on Monday, indicating that the state-backed real estate company has “substantial credit risk.” Vanke’s sales are reported to have fallen roughly 40% in the first two months of the calendar year as China’s property market continues to spiral lower. Moody’s expects the challenges facing the firm to continue over the next 12 to 18 months, with further downward revisions to Vanke’s credit rating possible. Vanke successfully raised $11.5 billion from a dozen Chinese banks to meet its obligations on Monday, but investors are dumping their shares on liquidity concerns. Investors had felt that Vanke was stable, since it is state backed, so this week’s problems raise considerable concerns about whether China is doing enough to prevent its property market problems from destabilizing the rest of the economy. Thus far, China’s economic plan is primarily focused on a) lower down payments for New Energy Vehicles, b) support for high tech companies, c) raising investments in major national projects and facilities, and d) supporting the construction of government housing projects. Observers see nothing new here to jumpstart the economy.
CONAB – Brazil’s version of USDA – pegged this year’s soybean crop at 146.858 million metric tons, down from 149.404 mmt the previous month, and down from USDA’s estimate of 155 mmt. Its all-corn production estimate dropped to 112.753 mmt, down from 113.696 mmt the previous month, and down from USDA’s estimate of 124.0 mmt. This again increases the debate over the size of this year’s crops in Brazil. USDA has the better track record in Brazil, in my view, but CONAB is still the local agency. That means that its estimates can’t simply be dismissed. What does it know that USDA does not, or what does USDA know that CONAB does not? This will keep the debate alive in these markets, perhaps making fund managers reluctant to add to already large short positions. Weather remains supportive for corn and soybean development in Argentina, but 40% of Brazil’s winter corn crop is now under stress with dry conditions coupled with high temperatures in the mid-90s to near 100° F over the next 10 days, although the crop is largely still in the vegetative stages of development.
