June 13 – Stock futures were subdued overnight ahead of this morning’s inflation data release, and ahead of the start of today’s meeting of the Federal Reserve, which will culminate with the release of its updated monetary policy statement tomorrow afternoon. The VIX is trading near 15 this morning, after initially dropping on the data release. The dollar index is trading at a three-week low near 103.1 following release of the consumer price index data. Yields on 10-year Treasuries are trading near 3.71%, while yields on 2-year Treasuries are trading near 4.52%. Both initially surged in the first seconds following the CPI data release, before sinking below pre-report levels as more numbers hit the wire. Crude oil prices initially found buyers on the data release, before pulling back to pre-report levels, and now they are trading nearly 3% higher on the session following big losses on Monday. The grain and oilseed sector is mostly higher on disappointing crop ratings as dryness remains the dominant theme across the Midwest.
The consumer price index rose 0.1% month-on-month in May, down from 0.4 in April and down from analyst expectations of 0.2%. That’s the headline number that grabbed the attention of Wall Street this morning. The CPI was up 4.0% year-on-year in May, down from 4.9% in April and below analyst expectations of 4.1%. The core CPI that excludes the more volatile food and energy sectors was up 0.4% month-on-month in May, matching the previous month and matching analyst expectations. The core CPI was up 5.3% year-on-year in May, down from 5.5% in April, but also matching analyst expectations. For what it is worth, the Cleveland Fed’s now-casting inflation indicator had predicted the headline CPI to be up 0.19% month-on-month and 4.13% year-on-year, while expecting the core CPI to be up 0.45% month-on-month and up 5.34% year-on-year. So, the actual numbers came in slightly below those expectations.
Breaking down the numbers, the decline in energy prices was largely behind the drop in the headline numbers in May, with energy commodities down 5.6% month-on-month and down 20.4% year-on-year. The biggest drop in that sector was in fuel oil, which fell 7.7% month-on-month, with the year-on-year number down 37.0%. Even electricity saw a 1% month-on-month decline in May. However, the core CPI held up due to a 0.6% rise in commodities less food and energy, along with a 4.4% month-on-month increase in used cars and trucks, and 0.6% month-on-month increases for medical care commodities and for shelter. The rise in shelter is a bit disheartening, reflecting the recent signs of recovery in the property markets. Transportation services were also up 0.8% month-on-month in May. Food away from home was also up 0.5% month-on-month and 8.3% year-on-year. The bottom line is that core inflation remains sticky. Wall Street continues to celebrate the decline in the headline number, but the Fed has been focused on the core numbers that show the stickiness of inflation that cannot be brought down to the 2% mandate without the continuation of hawkish policy. That’s especially true for a Fed that has repeatedly stated that it would rather error on the side of higher for longer on rates.
China signed deals worth $10 billion with Arab countries during its recent two-day Arab-China business conference, according to today’s edition of China Direct, published by our Shanghai office. The largest of the deals, worth $5.6 billion, was between Chinese electric car maker Human Horizons and Saudi Arabia’s investment ministry. The joint venture aims to help Saudi Arabia to establish an EV manufacturing industry, including automotive research, manufacturing, and eventually selling EVs in Saudi Arabia. This allows Chinese companies to build the infrastructure, and the electric vehicles, running new energy projects in the overseas market, thus taking pressure off struggling Chinese manufactures due to weaker demand from Western countries. It’s another example of how China is using its Belt and Road initiative to diversify away from the West while making participating countries more dependent on it.
El Nino tends to increase crop risks for Asia, while shifting the weather pattern to a more favorable one for the Americas. The correlation isn’t as strong in Asia, but something that we’ve been watching. Forecasters now see increased risks for a hotter than normal weather pattern to set up in North China in July and August that could negatively affect China’s ability to produce normal corn and soybean crops. It’s worth observing emerging dryness also developing in China’s Northwest, that could expand into Northeast crop areas in the weeks ahead. Sandstorm frequency is increasing in the drier Northwest, reflecting the growing drought problem there.
USDA reports that 61% of the nation’s corn crop rated Good to Excellent this week, while the same was true for 59% of the soybean crop, down 3 points for each crop from the previous week, and down from the five-year average for the week of 70% in both cases. The decline isn’t a surprise for me, considering last week’s weather, but it provided fresh fodder for fund buying of both in overnight trade, with momentum trading Algos buying the chart strength as well. Convective thunderstorms that are difficult to pick up in the forecast models are expected to slowly increase in frequency in the days and weeks ahead, but that also means that some areas will remain drier than desired, while others turn wet.
