December 11 – Inflation, retail sales, and the Federal Reserve are the focus on Wall Street this week, as traders look for key economic data to be released in the same week as further guidance is received from the Fed regarding monetary policy. Stock futures are mixed heading into the week. The VIX continues to trade near 13 this morning as the trade braces for what could be a more active week of headlines, while the dollar index is trading near 104.1, which is just below three-week highs. Yields on 10-year Treasuries are trading near 4.27% as traders focus on the Fed this week, while yields on 2-year Treasuries are trading near 4.76%, representing nearly two-week highs. Crude oil prices traded either side of unchanged overnight after setting fresh five-month lows last week, while the grain and oilseed markets were mixed.
Virtually nobody expects a rate change from the Federal Reserve when it meets this week to discuss potential shifts in its monetary policy. As such, the focus is on any potential changes in forward guidance that might emerge from the meetings. Some Wall Street analysts expect the first rate cut to come in March, while the majority of analysts expect it to come by the May meeting. These analysts have largely been wrong for the past 20 months, and it is my opinion that they will continue to be wrong, because they’re simply not listening to what the Fed is saying. The Fed repeatedly said that it is committed to not repeating its mistake of 1980, when it pivoted too soon, allowing inflation to get a stronger foothold. The “super-core” inflation numbers that it is focused on still do not show sufficient progress to justify a pivot, based on previous statements by the Fed. In fact, last week’s data suggested a tightening of the labor market with sustained wage inflation pressures. Sending a signal to the consumer and to the markets now of an approaching pivot would likely increase those inflationary pressures. And the economy remains resilient enough to give the Fed the latitude to maintain rates at current levels. That said, I have no doubt that Fed Chair Jerome Powell will face increasing difficulty in continuing to get his more dovish members to continue to support unanimous decisions by the policy group, which could provide some interesting drama.
We’ll see U.S. consumer price and producer price data released on Tuesday and Wednesday of this week, respectively, while retail sales data is released on Thursday. China released its CPI data for November today, reflecting deflationary pressures as its economy continues to struggle. China’s CPI was down 0.5% year-on-year in November, after being down 0.2% in October. One of the biggest contributors to that negative CPI was a 32% drop in pork prices year-on-year, although core CPI that excludes food and energy prices still fell by 0.3% month-on-month, although it was up 0.6% year-on-year. The ailing property sector continues to be a problem for the Chinese economy, with 60% of family assets tied to their property ownership. Consumers worried about the eroding value of their property tends to make them more conservative in their spending, which reduces retail sales, providing a drag on the economy. That then becomes a drag on manufacturing, combined with reduced exports to Europe and to the United States. China’s economy does not appear to be on the cusp of collapse, but it lacks the vigor necessary to support strong demand for commodities currently, unless those commodities are going toward building reserves.
Weekend rains were again scattered in Center-West Brazil, providing good relief for some, while leaving others high and dry, which has been the pattern throughout the growing season. More scattered showers are expected this week, but the overall pattern remains drier than normal for the northern third of Brazil’s soybean belt. This will continue to keep us balancing good yields against bad yields to assess overall lost production, while still contemplating risks for the upcoming winter corn crop that will be planted in 45 - 75 days. Recent private production estimates, including our StoneX Brazil customer survey, put the soybean crop near or above record levels. That number likely continues to trend lower, but it’s yet to be seen whether it will drop sufficiently to necessitate a notable increase in U.S. exports, especially amid expectations of a large Argentine crop. We do not yet have evidence that Brazil production will fall to levels necessitating more U.S. exports, but the possibility of such is what continues to provide underlying support to the market until more is known. China has stepped up purchases to hedge its risk, but that doesn’t mean that it will actually take shipment of those purchases in the current marketing year. We’ll get updated weekly inspection data today, but recent data suggests that shipments are falling far short of the levels needed to justify rationing demand with higher prices. Corn and wheat prices certainly found support recently from increased shipments to China, although continuation of those shipments appear to be somewhat price sensitive as well.
