November 14 – Today’s consumer price data set the early tone on Wall Street, confirming in the minds of traders that we are heading down the path needed for a Fed pivot next year. Stocks rallied, while the VIX is trading near 14 this morning, and the dollar index is trading near two-month lows at 104.6. Yields on 10-year Treasuries are trading at seven-week lows near 4.46%, while yields on 2-year Treasuries are trading near 4.85%. Crude oil prices are trading 1% higher as the dollar falls, while the grain and oilseed markets came off their lows as well.
The headline consumer price index was flat in October versus the previous month, which is better than the 0.1% gains expected and better than the 0.4% gains seen in September. The CPI was up 3.2% year-on-year in October, down from the 3.3% expected by analysts, and down from 3.7% the previous month. Core CPI that excludes the more volatile food and energy sectors rose just 0.2% month-on-month in October, down from analyst expectations that it would remain unchanged at 0.3% growth. The core CPI rose 4.0% year-on-year in October, down from analyst expectations that it would remain unchanged from September at 4.1%.
Energy prices fell 2.5% month-on-month in October, while being down 4.5% year-on-year, contributing to the positive headline inflation reading this morning. The decline was led by a 5.0% month-on-month decline in gasoline prices, which are down 5.3% year-on-year. Fuel oil dropped 0.8% month-on-month in October, while being down 21.4% year-on-year. Food prices rose 0.3% on the month, while being up 3.3% year-on-year. But core inflation also benefited from a 0.1% decline month-on-month in new-car prices, while used cars dropped 0.8% on the month, and they are down 7.1% on the year. Inflation in shelter costs slowed again to 0.3% on the month, down from 0.6% the previous month. Shelter inflation is still up 6.7% year-on-year. However, transportation costs continue to rise, going up 0.8% month-on-month in October, while being up 9.2% year-on-year.
The bottom line is the U.S. consumer is increasingly reluctant to make big purchases – be it a house or a car. But the consumer does want to spend their money on short-term entertainment – be it flying somewhere for a vacation or attending a concert. Overall, inflation is still trending in the right direction, although I expect that the Federal Reserve will continue to sound a hawkish tone until it feels that super core inflation – services minus shelter – is at a level that it believes is low enough for overall inflation to get down to the 2% mandate. That doesn’t mean that the Fed must go any higher with its rates, particularly with other factors in the economy doing the work of the Fed, but members of the Fed will want to be cautious about pivoting in their tone, fearing that the shift in tone might encourage a flurry of spending again that reignites demand before inflation gets down to the 2% level. Fed fund futures are trading a zero percent chance of a rate hike at its December meeting this morning, while pricing in just 6% odds of an increase in January, with the first cut coming in June of next year.
It remains hot and dry in Brazil’s highly productive Center-West region, with just very widely scattered thunderstorms providing very localized relief from triple-digit heat. Furthermore, forecast models are again pushing the more widespread relief later, with soaking rains now expected to start on Monday – a day or two later than what was in yesterday’s forecast. Next week’s forecast still looks impressively wet, but the delays are reminiscent of other forecasts over the past six weeks that failed to bring good rains forward in the forecast, and then disappointed when they did arrive. I’ll have more in-depth analysis of historical yield deviations of the past 30 years in my Midday Perspective Commentary later today to provide some historical perspective from other adverse weather years.
China booked 62 cargoes of soybeans last week, according to our cash sources in China, which is roughly double the normal weekly pace for early November. The bulk of the purchases were by state-owned enterprises for U.S. soybeans to be shipped December to March. Private crushers remained relatively quiet in the market, leading to speculation that the state-owned enterprises were buying as a goodwill gesture ahead of tomorrow’s scheduled meeting between Xi Jinping and Joe Biden. That could lead to more purchases this week, although more is needed just to catch up to the seasonal pace needed to hit USDA’s target for the year. That’s because China has already committed to 11.5 million metric tons (422 million bushels) of Brazilian soybeans for shipment in the last quarter of this year – a time when it typically leans almost entirely on U.S. supplies. That accounts for nearly half of all bookings for the period.
