December 12 – Stock futures had a positive tone overnight, leading up to this morning’s inflation data, as well as the start of this week’s meeting of the Federal Open Market Committee that will discuss whether a shift in monetary policy is appropriate. Both stock futures and the commodity sector saw a quick bump in values on the release of this morning’s inflation data, but that strength waned as traders further digested the numbers. The VIX continues to trade near multi-year lows below 13 this morning, reflecting a total lack of fear on Wall Street, while the dollar index is trading near 103.9. Yields on 10-year Treasuries are trading near 4.22%, while yields on 2-year Treasuries are trading near 4.72%. Crude oil prices are trading 2% lower in early trade, while the grain and oilseed sector traded mostly higher overnight.
The consumer price index rose 0.1% month-on-month in November, which is a bit hotter than analyst expectations that it would be flat during the month, just as it was in October. The CPI was up 3.1% year-on-year in November, matching analyst expectations, but down from 3.2% the previous month. Core CPI, which excludes the more volatile food and energy sectors, rose 0.3% month-on-month in November, matching analyst expectations, but up from 0.2% the previous month. Core CPI rose 4.0% year-on-year in November, matching analyst expectations, and matching the pace seen the previous month. A simple rendering of the November data indicates that a rise in shelter, transportation, medical services, and used vehicles offset notable declines in energy prices.
Fed fund futures immediately increased the odds of a Fed rate cut by the March meeting when this morning’s data was released, which represents a total disconnect with what the data indicates versus what the Fed has been telling us for the past year. The Fed again repeatedly said that it would rather error on the side of “too high for too long” rather than pivot too soon. It said repeatedly that it would not pivot until it was confident that we were on a sustainable path that it was confident would take us back to the 2% inflation mandate, and that its primary focus was on shelter and wage costs. Today’s data, combined with last week’s employment data, suggests that inflation remains quite sticky in those sectors. The “group think” on Wall Street is that the Fed must start pivoting early in 2024, but the “group think” has been wrong for the past 20 months. I believe that the above provides the rationale for the Fed to strengthen its hawkish rhetoric when it releases its statement on Wednesday. The primary question may be, will the tone of the comments emerging from the Fed and from Fed Chair Jerome Powell in his press conference be convincing? It hasn’t been in some of Powell’s recent appearances, so we’ll see if he works on that. Part of the problem may be that Powell continues to insist on unanimous policy decisions, and it’s getting more difficult to achieve that from some of his stronger dove members who are giving in to the “group think” of Wall Street. It was interesting to see those odds of a rate cut shift later to May in Fed fund futures trading as traders further digested the data this morning.
Argentina has vast rich agricultural resources, but that country has been unable to take advantage of those resources due to a punishing fiscal policy that heavily taxed output. President Milei took office on Sunday, after winning election on a campaign to slash those taxes, while doing the same with the social programs that they were funding with those taxes. He surprised the “experts” with his election, but that may have been the easy part of the equation. He must now survive implementation of his plan. Yet, Milei appears committed to doing so. Argentina temporarily suspended its grains export register on Monday, the day after President Javier Milei was sworn into office. Suspension of the register typically comes ahead of a major change in economic measures. The industry is hoping / expecting a major announcement regarding changes to tax policy combined with cuts to social spending.
There’s very little in this week’s forecast to give hope to farmers in dry areas of Center-West Brazil. It will be hot, with just scattered storms across the region this week as more substantial relief continues to get pushed back in the forecast. Losses are substantial for some farmers, but a short distance away, crops look good. That’s one reason why local analysts continue to make just modest cuts to the size of the national crop – certainly not big enough cuts yet to demand an increase in U.S. exports. China continues to buy from both Brazil and the United States for near-term shipment, although roughly 80% of its January shipment purchases are from the United States. But Brazil soybeans are more than 60 cents per bushel cheaper than U.S. soybeans for February shipment, so we will rapidly see U.S. shipments trail off February into March if nothing changes. The risks are sufficient to provide support under the market until traders are comfortable that snug U.S. supplies will be sufficient as this all plays out in the weeks ahead, with the focus then shifting to the anticipated size of the winter (safrinha) corn crop that will be planted immediately behind the soybean harvest. Keep in mind though that the big U.S. corn stocks currently in place provide a much larger safety net against a problem with Brazil’s crop than do its tighter soybean stocks.
