June 30 – Stocks have an upbeat tone to them this morning, supported by slightly better inflation data than expected, along with this week’s favorable economic data overall. It’s also the final trading day of the month and the fiscal quarter, which may lead to some erratic trading at times. We’re also about to start a holiday period for many traders. The markets will be closed on Tuesday for the Independence Day holiday. The markets will be open on Monday, but many traders will take the day off to give them a four-day holiday. Nonetheless, Treasury yields pressed higher overnight on expectations that the Fed has more rate hikes coming for the U.S. economy. Yet, the VIX is trading near 13 this morning, reflecting optimism on the Street. The dollar index pushed to a fresh two-week high overnight above 103.5 when both the 10-year and the 2-year Treasuries reached their highest levels since early March, although they have now pulled back following the release of this morning’s inflation data, allowing the greenback to slip lower as well. The dollar index is currently trading near 103.0. Yields on 10-year Treasuries are trading near 3.85%, down from their session high of 3.89%, while yields on 2-year Treasuries are trading near 4.89%, down from their session high near 4.94%. Crude oil prices are modestly higher at a one-week high, while the grain and oilseed sector is mostly higher ahead of today’s USDA reports.
Personal income rose 0.4% month-on-month in May, up from 0.3% the previous month, but matching analyst expectations. Personal consumption expenditures rose just 0.1% month-on-month in May, down from 0.6% in April, and down from analyst expectations of 0.2% growth. As such, the May PCE price index also just rose 0.1% month-on-month in May, matching analyst expectations, but down from 0.4% in April. The PCE price index was up 3.8% year-on-year in May, again matching analyst expectations, while down from 4.3% the previous month. The core PCE price index that excludes the more volatile food and energy sectors rose 0.3% month-on-month in May, down from 0.4% in April and down from analyst expectations of 0.4%. The core PCE rose 4.6% year-on-year in May, down from 4.7% in April and down from analyst expectations that it would remain at 4.7%.
Today’s PCE inflation data gave traders a sense of optimism that the Federal Reserve could back off of its hawkish stance. This morning’s Fed fund futures trading still gives 84% odds of a 25-basis point rate hike when the Fed meets next month, although that’s down 5 points from yesterday’s trade. It also reflects 37% odds of an additional rate hike by the November meeting, although that too is down several points from yesterday. So, today’s PCE inflation data, which the Fed historically favors, hasn’t thus far led the market to say that the Fed won’t do what it says that it will do, but it eases some fears that the Fed might prove to be more hawkish than it previously understood. Fed fund futures continue to suggest that we could see its benchmark rate fall as far as 4% by the end of next year in a series of rate cuts, and that’s what gives Wall Street optimism. We’ll get critical consumer sentiment data later this morning that could also influence this sentiment.
Factory activity contracted in China for the third consecutive month in June, although by a narrower margin this time. Meanwhile, the service sector continued to post modest growth, albeit at a slower pace. That’s more concerning, since the service sector needs to carry China’s economy this year amid a loss of export trade to Europe and to the United States. It’s noteworthy that South Korean tech giant Samsung was noticeably absent from the MWC Shanghai 2023 mobile industry event that included 300 exhibitors from around the globe. It was China’s first in-person exhibition post-Covid. In contrast, Samsung was a major exhibitor and sponsor at MWC Barcelona earlier this year. Furthermore, U.S.-based Qualcomm and Swedish telecommunication equipment maker Ericsson was also absent after reportedly mysteriously backing out at the last minute. The noted absence of these tech giants suggests that they may be shifting their focus away from China at a time when the U.S. is also adding more restrictions on AI chips to China and the Netherlands announced new export rules targeting China as well.
USDA is scheduled to release the results of two June 1 surveys at Noon Eastern Daylight time today. The first is a producer planting survey to reveal how many acres of each of the major crops that farmers planted this year. The planting season was fairly normal this year, so few surprises are expected here, although we should see a modest decline in cotton acres, combined with modest increase in soybeans, and grain sorghum. The bigger potential for a market-moving surprise comes in the quarterly stocks data, with implications for the current and next marketing year balance sheets. Meanwhile, we continue to see the anticipated weather shift take place for dry areas of the Midwest. Unfortunately, as is often the case in breaking a drought, it comes with severe weather. A derecho storm packing fierce winds downed crops and buildings over a 500+ mile path through Illinois yesterday. Crop loss assessments will take time, but history tells us this storm will likely prove a drag to production in the region. Unfortunately, more severe storms are expected in the days ahead as the pattern shift continues to evolve, bringing heavy rains to previously dry areas of the Midwest.
