By: Arlan Suderman, Chief Commodities Economist
May 10 – Stock futures erased early losses to push modestly higher following the release of this morning’s consumer price index data, although the data could be interpreted in several different ways. The VIX fell notably on the data’s release to trade just above 16, as stock traders chose to see this morning’s CPI as evidence that the Federal Reserve’s previous work is having the desired effect of lowering inflation. The dollar index also fell with Treasury yields on the CPI release, and it is currently trading near 101.3. Yields on 10-year Treasuries are trading near 3.47%, while yields on 2-year Treasuries are trading near 3.97%. Crude oil prices firmed to trade near unchanged on the data release, but slipped modestly lower again, while grain and oilseed prices are also modestly lower this morning.
The April CPI rose 0.4% month-on-month, up from 0.1% the previous month, but matching analyst expectations. The headline CPI rose 4.9% year-on-year in April, down from 5.0% the previous month, and down from analyst expectations of 5.0%. Those are the numbers that Wall Street celebrated. Yes, the month-on-month CPI rose in April, largely due to rising energy prices, but those prices have since backed off, giving hope to Wall Street that overall inflation will be trending lower. But that’s not the whole story. The core CPI that excludes the more volatile food and energy sectors also rose 0.4% month-on-month, matching the previous month and matching analyst expectations. The core CPI was up 5.5% year-on-year in April, down from 5.6% in March, but matching analyst expectations. This suggests that core inflation that removes those energy prices remains quite sticky. Fuel oil and natural gas prices fell 4.5% and 4.9% month-on-month respectively in April, providing the bulk of the downward pressure on the above numbers during the month. Those items were countered by a 3% rise in gasoline prices, as expected, as well as a resurgence in used car prices of 4.4% as demand for new cars backed off. Services less energy and shelter both rose 0.4% month-on-month, while medical care commodities rose 0.5%, and commodities less food and energy rose 0.6%. I do not think that this automatically puts another rate hike in play for the Fed’s June meeting, but it certainly does not provide fodder for cutting rates.
The Energy Information Administration released its short-term energy outlook for May yesterday, stating that the White House intends to start replenishing the Strategic Petroleum Reserve early next year, while giving no volume targets. The reserves are currently at roughly four-decade lows, leaving us vulnerable should a shortage develop – either naturally or due to geopolitical risks. The report indicates that replenishing is being delayed to complete maintenance work on storage caverns. The report initially provided support for the crude oil market, but the backward-dated curve’s slight shift lower with a flatter structure implied that the market sees little risk of significant purchases for the SPR next year. Keep in mind that next year is a presidential election year. Purchasing oil for the SPR is expected to be inflationary, pushing prices that consumers pay for gasoline at the pump higher. That’s generally not good for the party in power. Another key item in that report was the EIA’s estimate that U.S. crude oil production will be 12.58 million barrels per day this month, with this year’s average expected to average 12.53 mbpd, rising to just 12.69 mbpd next year. In other words, it’s growing increasingly difficult in the current environment to increase output, so any notable rise in demand from an economic recovery would be expected to result in shortages – domestically and globally.
Formal negotiations finally started in Istanbul today to extend the Ukraine grain initiative, with all parties present. The objective is to extend the initiative, but Turkey also wants to negotiate a detailed safe evacuation plan for Turkish merchant ships and their crews who are stuck in Ukrainian ports, along with many other ships and crews. Russia restarted inspections of ships yesterday, but only specifically designated ships leaving Ukraine, while still not inspecting any new ships to go to Ukraine ports. On a related note, China will host the first China-Central Asia Summit next week, involving countries key to its Belt and Road Initiative – primarily in central Asia and former members of the U.S.S.R. China sees its investment in these countries as critical to its economic and military security at a time when the United States in strengthening ties with Japan, the Philippines, and South Korea. These latter countries are moving away from China toward stronger cooperation with the United States while strengthening their military presence in the region.
Grain and oilseed traders are increasingly focused on Friday’s big USDA WASDE crop report. This will be the first crop report that officially has USDA’s estimates for the new 2023-24 marketing year. We expect USDA to use corn and soybean acreage from its March 31 survey results and yields from its February Outlook Forum estimates. As such, the supply side is largely known for these crops. Its wheat production estimate will be based in part on actual field surveys of the winter wheat crop. The hard red winter wheat crop – the largest class of wheat – was devastated by drought this year. However, the primary focus will likely be on USDA’s demand estimates. It will have to justify significant growth in corn and soybean demand to prevent notable increases in domestic corn and soybean stocks. That may be difficult to accomplish with expanded South American production as we shift into an El Nino growth cycle in the coming months.
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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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