October 10 – September inflation data came in a bit hotter than expected this morning, while first-time claims for unemployment benefits jumped more than expected as well. The combination pushed stock futures modestly lower, while elevating the VIX to trade above 21. The dollar index is trading near 102.9 this morning, after posting fresh eight-week highs. Yields on 10-year Treasuries are trading near 4.08%, after hitting fresh 10-week highs this morning, while yields on 2-year Treasuries are trading near 3.97%. Both initially popped higher following the inflation data release, but then came back down on the weekly jobless numbers. Crude oil prices are rebounding this morning on renewed Middle East geopolitical risk concerns, while the grain and oilseed markets are again mixed.
The headline consumer price index rose 0.2% month-on-month in September, matching the previous month’s pace, but above analyst expectations that it would decline to 0.1%. The headline CPI rose 2.4% year-on-year in September, down from 2.5% the previous month, but exceeding analyst expectations of 2.3%. But it continues to be the core numbers that exclude the more volatile food and energy sectors that grab the attention of traders and of policymakers. The core CPI rose 0.3% month-on-month in September, matching the previous month’s pace, but exceeding analyst expectations that it would decline to 0.2%. The core CPI rose 3.3% year-on-year in September, up from 3.2% the previous month, and up from analyst expectations of 3.2%.
The data was quite divergent over the past month, providing a mixed message. Energy prices dropped 1.9% month-on-month in September, with energy commodities down 4.0%, gasoline down 4.1%, and fuel oil down 6.0% month-on-month. Medical care commodities also declined by 0.7% month-on-month. However, food prices were up 0.4% on the month, while energy services (including both electricity and natural gas) were up 0.7% on the month. Apparel prices were up 1.1% month-on-month, while transportation services rose 1.4%. New and used vehicles were up 0.2% and 0.3% respectively on the month. Again, the concern is the lingering sticky inflation in the service sector – especially for transportation services. Shelter inflation slowed to just 0.2% on the month, which was a positive, but I look for that to rise again down the road as consumers take advantage of lower interest rates to increase demand for houses once again. The bottom line is that it would be a stretch to use today’s data as evidence of renewed reinflation, but it does indicate that it’s premature to say that the battle against inflation is dead, and that we remain vulnerable when/if energy prices surge again.
First-time claims for unemployment benefits jumped to 258K in the week ending October 5, up from 225K the previous week, and up from analyst expectations of 226K. The four-week moving average rose to 231K, up from 224.25K the previous week. Pouring through the data we see that weekly claims dropped in many of the states most impacted by Hurricane Helene in the week ending September 28 as people focused on the approaching storm, but then claims jumped in the week following the storm’s impact. I wouldn’t be surprised if we continue to see more increases in the weeks ahead, combined with increased claims in Florida from the impact of Hurricane Milton. Continuing claims for the week ending September 28 rose by 42K to 1.861 million, with the four-week moving average rising by 4,500 to 1.832 million. Look for these numbers to continue to rise following the devastation of Helene and Milton in the weeks ahead.
Wheat prices found support again overnight from the lingering dryness in the Black Sea winter wheat belt. Forecast models are encouraging for rains to reach western areas of the belt, with 1.0 – 1.5” expected in central Ukraine in the next few days, with much lighter amounts stretching east into Russia. In fact, much of Russia’s winter wheat belt is expected to receive less than 0.5”, with many areas seeing less than 0.25”. Additional support comes from the fact that Russia has stepped up attacks on Ukraine’s export infrastructure, including a few ships being directly hit over the past week. Ukraine is listed as a high-risk area by marine insurers, resulting in higher costs for insurance coverage. One insurer noted that ships hauling commodities from Ukraine were at a “heightened risk of direct attack by Russian forces.” Ukraine officials deny there there’s been an increase in insurance rates, but one Ukrainian broker told Reuters, “Our clients tell us that some owners are cancelling vessels and give bombing as the reason.” The question then is, at what point would Ukraine consider retaliation directly on Russia’s ability to export grain and oil? Regardless, Russian exporters are expected to meet tomorrow with authorities to consider ways of curtailing exports in the months ahead. This has been widely anticipated by the markets, accounting in part for the rise in wheat futures over the past couple of months. Meanwhile, corn and soybean prices continue to feel the impact of a rapid harvest of this year’s big U.S. crops that are struggling to find sufficient storage space. Further downward pressure comes from the actual arrival of the long-anticipated rains to dry areas of Center-West Brazil.
