July 16 – Stocks continue to consolidate near recent record highs this morning as earnings season unfolds, inflation and retail sales data is released, and as President Trump’s tariff war continues to develop. Yet, the VIX is back to trading below 17 this morning, while the dollar index is trading near 98.7. Yields on 10-year Treasuries are trading near 4.46%, pulling back from five-week highs following the release of this morning’s inflation data, while yields on 2-year Treasuries are trading near 3.93%. Crude oil prices are roughly 1% lower as the energy markets worry about the negative economic impacts of the tariff war, while the grain and oilseed markets were mixed to higher in overnight trade.
Headline inflation at the wholesale level was flat in June. The producer price index did not change month-on-month in June, falling short of analyst expectations that it would rise by 0.2%. The May PPI was revised to 0.3% gains on the month, up from the 0.1% originally reported. The headline PPI rose 2.3% year-on-year in June, down from analyst expectations of 2.5%, and down from the 2.6% seen in May. The core PPI was also flat on the month, down from analyst expectations of 0.2%, and down from an upwardly revised 0.4% the previous month. The core PPI rose 2.6% year-on-year in June, matching analyst expectations, but down from 3.0% the previous month. Goods inflation at the producer level came in at 0.3% on the month and 1.7% year-on-year, up from 0.25 and 1.3% respectively, reflecting the effect of the tariffs. However, services inflation at the producer level came in at -0.1% on the month and +2.7% year-on-year, down from +0.4% on the month and +3.2% on the year in May. In other words, we see some inflation from the tariff war at the producer level, but it is being more than offset by lower prices in the service sector at this point, keeping overall inflation relatively contained at the producer level. As such, the odds of a September rate cut by the Federal Reserve ticked slightly higher this morning, after declining on yesterday’s consumer inflation numbers that came in hotter than expected.
The markets gave a big sigh of relief when a “deal” was reached with China some weeks back that allowed rare earth minerals and magnets to flow to the United States. The “deal” was reportedly reached a couple of days prior, but neither side said much about it, raising some questions. I stated at the time that both sides likely gave up more than they’d want discussed publicly to get what they felt that they needed to have, and that looks to be the case. The so-called deal opens a six-month window, according to industry reports, for rare earth minerals and magnets to flow to the United States for auto production, but there are indications that many other uses are still restricted, likely including military use. That deal prevented the shutdown of some of our auto production lines. I speculated at the time that the United States in exchange allowed China to receive high level chips that it needed, and we now learn that Nvidia is again allowed to ship the highly sought after H20s chips to China. Each side has a dependency on the other that they don’t like, requiring them to give what they don’t want to give. To be clear, China is restricting exports of rare earth minerals and magnets to much of the world, giving it tremendous leverage in controlling who has these products for industrial and military development. China controls 90% of the world’s supply of rare earth minerals and magnets. But it also really needs the high-quality chips produced by Nvidia for its industrial and military development. Thus, the deal was reached for a six-month window.
We’re currently in a 90-day pause period of reciprocal and retaliatory tariffs with China that ends on August 12, with no significant deals reached other than the above that involves rare earth minerals and magnets, as well as chips. U.S. Secretary of the Treasury Scott Bessent stated in a media interview on Tuesday that we need not worry about the August 12 deadline with China, raising speculation that each side had enough leverage to force another deal. Does that mean that the two sides are resolving their differences? I would argue that they are not. But they are learning of their dependencies on one another in certain sectors, like what I outlined above. As such, we will likely see more agreements involving those critical dependencies, while continuing the overall trade war. Are energy and Ag commodities among those dependencies? Neither are currently considered in those categories. Energy could become one of those dependencies if President Trump would be able to successfully sanction Russia, but shutting off Russian oil will be difficult. As for Ag commodities, China currently has ample alternatives in Ukraine, Brazil and Argentina to keep it supplied, along with a host of other countries.
The U.S. corn pollination issues I’ve been describing are getting more discussion in the trade, making fund managers with large short positions nervous. Yet, rallies thus far are being sold amid the ongoing high crop ratings, and the fact that both the American and Brazilian farmer is heavily undersold. Value buyers are providing some support currently for corn, soybeans and wheat, but none of the above currently possess a story to sustain a rally.
