July 28 – Inflation is once again the focus today following the release of the latest PCE data that the Federal Reserve favors. The data confirmed what the CPI data has been showing that headline inflation is trending downward, while core inflation remains a problem that Wall Street would just as soon ignore, and it largely is. The VIX is trading below 14 this morning, while the dollar index is trading near 101.7. Yields on 10-year Treasuries are trading near 3.98%, after pushing above 4.04% earlier in the session. Yields on 2-year Treasuries are trading near 4.89%. Crude oil prices are 1% lower in early trade, after hitting fresh three-month highs on Thursday. The grain and oilseed sector is mostly lower in early trade as we close out the week.
Personal income rose 0.3% month-on-month in June, which was down from analyst expectations of 0.4%, although the May reading was revised upward a tick to 0.5% gains. Personal consumption expenditures rose 0.5% month-on-month in June, exceeding analyst expectations of 0.4%, and up from an upwardly revised 0.2% the previous month. The PCE price index rose 0.2% month-on-month as expected by analysts, although that is up from 0.1% the previous month. The PCE price index was up 3.0% year-on-year in June, matching analyst expectations, and down from 3.8% the previous month. The core PCE price index that excludes the more volatile food and energy sectors rose 0.2% month-on-month in June, matching analyst expectations, and down from 0.3% the previous month. The core PCE price index was up 4.1% year-on-year in June, down from analyst expectations of 4.2%, and down from 4.6% year-on-year. The above data came in very close to the Cleveland Feds nowcasting forecast for inflation, with the exception of the core PCE price index coming in slightly below year-on-year expectations. That’s the good news. The bad news is that the Cleveland Fed’s nowcasting forecast calls for both headline inflation and core inflation to rise again in the July data that is released next month. However, Wall Street isn’t really focused on that currently.
The employment cost index is another key data point that the Federal Reserve follows, providing an indication of wage inflation in the economy. The index rose 1.0% quarter on quarter in the second quarter. That’s down from 1.2% gains in the first quarter, and below analyst expectations of 1.1%. The employment cost index was up 4.5% year-on-year in the second quarter, which is down from 4.8% in the first quarter. That’s a move in the right direction, but it is still too high to pull headline inflation that final percentage point lower to the 2% mandate. Furthermore, we’re seeing early signs of commodity inflation once again, most notably in the energy sector, but Black Sea risks are also raising longer-term concerns for the food sector as well.
The European Union’s Ag Commissioner stated this week that Europe is committed to creating “solidarity lanes” for moving Ukraine grain west across Europe to export channels. The commissioner is from Poland, where he has spoken for protecting farmers from the adverse effects of dumping Ukraine grain on European markets. Yet, Europe is also committed to not allowing Ukraine’s agriculture to be shut down. Creating these solidary lanes would cost money to subsidize freight, and the commissioner stated a commitment to such. However, it’s also been reported this week that the money isn’t currently there to subsidize Ukraine land exports. Look for Europe to “find a way” to help Ukraine, while also helping Eastern Europe farmers with subsidies as well. It’s the cost of making sure that Putin doesn’t win the war in Ukraine. They will do what they have to do, albeit at a significant cost.
Heat is expected to remain entrenched in central and southwestern portions of the Midwest over the coming week before temperatures moderate into week #2. Temperatures are already moderating in the far northwestern Midwest, with readings expected in the 70s°F today, with readings moderating across the northern 60% of the Midwest by tomorrow. Ridge-running storms are expected to continue riding over and around the top of the ridge. These storms will be scattered in nature, providing good rains for those fortunate enough to get them, but leaving other areas high and dry. Rain chances become more active in week #2 through the central part of the Midwest, leading into what is expected to be a generally favorable weather pattern during August. The primary question at that point will focus on the scope of the damage done during the two periods of stress this year – June and again late July. We’ll see a lot more people walking fields to make yield estimates as we get into August. I expect a great deal of variability in what they find, depending on the area and the specific hybrids planted. StoneX plans to release the results of its August customer production survey next Wednesday, with several other private estimates in the days that follow to set the tone going into the August USDA WASDE crop report. End users are getting nervous that this year’s supply may fall short, and they are starting to step up coverage of new-crop soybeans. China, Mexico and “unknown destinations” (believed to be China) purchased a combined 33.4 million bushels of soybeans overnight, continuing the pickup in demand we’ve seen for new-crop soybeans in recent days. New-crop sales prior to this have been very slow, with buyers focused on lingering cheaper Brazilian supplies.
