June 28 – Inflation is the focus today on Wall Street, with next week’s focus shifting to the monthly jobs report to be released on July 5th. Stock futures turned briefly volatile, before settling near where they were prior to the data release this morning to lower, as the inflation numbers came in as expected for the most part, although the numbers provided reasons for both the doves and the hawks to make arguments in their direction. Yet, the VIX is trading near 12 this morning as traders debate the ramifications of last night’s presidential debate, while the dollar index is trading near 105.9. Yields on 10-year Treasuries are trading 4.26%, while yields on 2-year Treasuries are trading near 4.68%. Crude oil prices are just modestly higher at this hour, after setting fresh eight-week highs earlier in the session. The grain and oilseed markets generally drifted higher overnight, ahead of a couple of big USDA reports scheduled for release later today.
Personal income rose 0.5% month-on-month in May, up from 0.3% the previous month, and above analyst expectations of 0.4%, reflecting a notable growth in income during the month. Personal consumption expenditures grew 0.2% month-on-month in May, matching the previous month’s pace, but falling short of analyst expectations of 0.3%. Income rose by more than expenditures as consumers turned more cautious as worries about the future trended higher during the month of May.
The headline PCE price index was flat in May, down from 0.3% growth in April, but matching analyst expectations. The headline PCE price index rose 2.6% year-on-year in May, down from 2.7% in April, but matching analyst expectations. The Federal Reserve’s favored core PCE price index that excludes the more volatile food and energy sectors rose 0.1% month-on-month in May, matching analyst expectations, while the April number was revised a tick higher to 0.3%. The core PCE price index rose 2.7% year-on-year in May, down from 2.8% in April, but above analyst expectations of 2.6%. The doves will argue that we are continuing to make progress toward the 2% mandate, while the hawks will argue that progress is too slow, and that income is rising in a way that would leave us vulnerable to a rebound of inflation if consumer sentiment were to improve, which a rate cut would be expected to trigger in the economy. As such, I do not expect this report alone to change the sentiment of members of the Federal Open Market Committee, but it does set the stage for the monthly jobs report, which could help move the needle in that direction, based on recent weekly data. This morning’s data barely budged Fed fund futures, which continue to show roughly 10% odds of a rate cut at the end of July, but 66% odds of a cut in September.
Much of the world witnessed a train wreck last night in the first 2024 presidential debates. I’m frequently asked at speaking engagements about the expected impact of this year’s presidential election on the commodity markets. That’s a difficult question to answer, not from an economist standpoint, but from a political standpoint. No matter how neutral one tries to remain, people hear things through the filter of their political leaning, and therefore will accuse you of being political in your commentary, regardless of what you say. But it is a factor that impacts the markets, and thus cannot be ignored. My answer over the past six months has been that the question is complicated by the fact that politics frequently changes in October, making predictions difficult to make. But this year I also said that I felt that there was a high probability that the November ballot would not reflect a race between Donald Trump and Joe Biden. Trump was facing numerous legal problems, and Joe Biden’s cognitive skills were noticeably deteriorating. One or both candidates might not survive the race until the November ballot. Trump is thus far surviving his legal challenges in the political arena, while Biden’s struggles appear to be escalating. Replace either one of these candidates, and it totally changes the political dynamics, throwing more uncertainty into the outcome.
From a commodity standpoint, I look primarily at two things – trade and geopolitical risks, and in both cases the first and foremost country you look at relative to the impact on the commodities in China. As for trade with China, Washington insiders now agree that there is currently very little difference between Trump and Biden in their trade policies toward China, reflecting a rising public opinion in the United States to get tough with the world’s second largest power. The two would however, be expected to utilize different approaches regarding the rising tensions between the two countries. China’s President Xi Jinping faces a decision following last night’s debate on whether he would prefer to make a move to “reunite” Taiwan to the Mainland while Biden is in office, Trump is in office, or wait another five years for the next unknown candidate who will take office in 2027? It’s not a matter of IF, in my opinion, but of When. Regardless, I expect China to continue to deleverage away from dependency on U.S. commodities. It’s largely already done so in energy, and it is moving in that direction with the food-based commodities. The election has more to do with impacting the timing of that move, than it does with the end result, in my opinion.
