June 12 – Inflation is the story this morning, or the perceived lack of it, while the Federal Reserve’s response to the latest data will be the focus later today. Stock futures surged to fresh record highs in some cases this morning following the release of the latest consumer price index data on hopes that it will influence members of the Federal Open Market Committee as they hold the second and last day of their current round of meetings today. The VIX dropped to trade near 12 on the data release, while Treasury yields fell to fresh two-month lows. The dollar index is trading near 104.4 at this hour, as it follows those Treasury yields. Yields on 10-year Treasuries are trading near 4.29%, while yields on 2-year Treasuries are trading near 4.70%, having broken below the 100-day moving average. Crude oil prices are more than 1% higher as the push to new highs for the month of June, while the grain and oilseed markets are mixed once again as traders position for today’s big USDA WASDE crop report.
Today’s CPI numbers came in below expectations across the board. The headline consumer price index was flat month-on-month in May, which was better than the 0.1% growth expected by analysts, and down from the 0.3% gains seen in April. The CPI was up 3.3% year-on-year in May, down from analyst expectations that it would remain at 3.4%. The core CPI number that excludes the more volatile food and energy sectors rose 0.2% month-on-month in May, down from analyst expectations that it would remain at 0.3%. The core CPI rose 3.4% year-on-year in May, down from analyst expectations of 3.5% and down from 3.6% the previous month. These numbers were largely better than expected across the board. They’re not yet down to the 2% mandate, as has been the case for the past several years, but they are incrementally better and incrementally moving in the right direction. Wall Street doesn’t care about the 2% mandate. All it wants to see is a rate cut from the Federal Reserve, and it hopes that today’s numbers will keep that hope alive for later this year.
Lower energy prices were a big part of today’s better-than-expected inflation numbers, with gasoline down 3.6% month-on-month in May, and natural gas prices down 0.8%. But transportation services were down 0.5% month-on-month. That is a big one, as rising auto insurance costs have been a big driver of that sector. Transportation services are still up 10.5% year-on-year. Shelter is still a problem, up 0.4% month-on-month and up 5.4% year-on-year, with indications that we could see more upward pressure in that sector in the last half of this year. New vehicle prices dropped 0.5% month-on-month, and they are now down 0.8% year-on-year, but used vehicle prices bounced back to 0.6% month-on-month gains after seeing prices erode for much of this year. Food eaten at home was flat on the month, and up just 1.0% year-on-year, while food eaten away from home was up 0.4% month-on-month and up 4.0% year-on-year as wages push prices upward in that sector.
China’s CPI rose just 0.3% year-on-year in May, with little boost at all from holiday travel during the month. China’s core CPI did a bit better at 0.6% growth year-on-year, but that was down from 0.7% the previous month. Tourism has been the strength of China’s economy this year, but it saw prices fall 0.6% month-on-month, indicating a softening in that sector. Ironically, pork prices were up 1.1% month-on-month in May, and up 4.6% year-on-year, as China finally gets past an over-supply of its favorite fresh meat. Yet, authorities still anticipate an additional decline of pork consumption this year of as much as 5.3% year-on-year. The property sector continues to hurt after an initial boost from policy-induced sales for about two weeks, with new house sales in the 20 largest cities down 24% week-on-week, while second-hand house sales fell 6%. Electric car exports totaled 94,000 in May, down nearly 19% year-on-year and down 4% month-on-month. Exports of all passenger cars were down 23% year-on-year.
Soybean and soybean product prices surged recently when Brazil’s president used an executive order to raise corporate tax burdens by closing a tax “loophole.” The new tax went into effect immediately, but it needed to be ratified by Congress within 120 days to remain in effect. Corporate interest, particularly in the agricultural sector, united to make their voice heard. As such, the Senate sent the new tax change back to the Administration without a vote, saying that it lacked support. As such, it is expected to die a natural death.
Today’s USDA WASDE crop report is expected to be a quiet one, with no changes to U.S. corn and soybean production estimates, an increase to wheat production estimates, and only modest changes to demand estimates. Watch for cuts though for Argentine and Brazilian corn production estimates, along with another possible cut to Brazil’s soybean crop. But the trade may be most focused on Black Sea wheat production estimates. Meanwhile, China continues to aggressively purchase Brazilian soybeans, for both this summer, and for next winter, while buying very few U.S. soybeans for fall shipment, with U.S. new-crop sales barely moving the needle thus far.
