March 11 – Inflation will again be the focus on Wall Street this week, as we’ll see the consumer price index data released tomorrow morning, followed by producer price data on Thursday, along with key retail sales data. That has traders nervous to start the week, with stock futures cautiously lower in overnight trade. The VIX pushed back above 15 overnight, while the dollar index traded near 102.8; bouncing off nearly eight-week lows posted on Friday. Yields on 10-year Treasuries traded near 4.08%, while yields on 2-year Treasuries traded near 4.51%. Crude oil prices are modestly weaker this morning, while the grain and oilseed sector pulled back from Friday’s impressive gains.
Tomorrow’s CPI data is expected to show that headline inflation at the consumer level rose at 0.4% month-on-month in February, while rising 3.1% year-on-year, according to the average analyst estimate. That would match up pretty well with what the Cleveland Federal Reserve model projects. It would reflect a bit hotter inflation than observed the previous month, while the year-on-year number would be unchanged. Core inflation that excludes food and energy is expected to slip though to 0.3% month-on-month and 3.7% year-on-year. The problem is that these numbers have come in hotter than expected the past two months. That is what has Wall Street nervous to start the week. The two-year breakeven inflation rate is trading near one-year highs just below 3%, while the five-year breakeven inflation rate is approaching 2.5%. The question will be, at what point will managed money start questioning its short positions in the commodities amid rising inflation? For that to happen, they likely need to see this reinflation trend as something that has legs beneath it, and I don’t think that we’re there yet.
China’s economic news is mixed today. Its CPI data surprised to the upside, although a deeper dive into the data tells a different story. February inflation came in up 0.7% year-on-year, above analyst expectations of 0.3%. The core CPI rose 1.2% year-on-year, up from 0.4% in January and a 25-month high. The numbers were largely elevated due to a surge in tourism, up 13.1% month-on-month and 23.1% year-on-year due to the rise in this year’s Lunar New Year travel. That also increased demand for food and services as people traveled. However, spending on big-ticket items remain depressed. Rental prices were flat in February, while appliances were down 0.1% year-on-year. Passenger car sales were the lowest in 22 months, down 46.2% month-on-month and down 21% year-on-year. Sales in January and February combined were the second lowest in four years, albeit up 17% year-on-year. New-energy vehicle sales totaled 388K, down 11.6% year-on-year, and down 42% month-on-month. This comes at a time when NEV sales overseas also face significant headwinds as both Europe and the United States add restrictions against their sales there. This coincides with China trying to stimulate its economy with emphasis on technology, including NEV sales, creating more challenges for policymakers when those sales stumble.
USDA’s monthly WASDE crop report was largely seen as benign for the commodity markets on Friday, but there were some interesting changes contained within its soybean balance sheet that are worth noting. The most obvious change was USDA’s Brazil soybean production estimate of 155 million metric tons, reflecting just a 1 mmt decline for the second consecutive month, when private estimates are either side of 150 mmt. Keep in mind that I mentioned a few weeks ago that there is evidence in the satellite data that soybean acreage has been expanding much faster than previously believed in recent years, offsetting yield reductions from this year’s adverse weather. That stance is supported by the way that USDA continues to upwardly revise its production estimate for the previous year, which is now has at 162 mmt, up 5 mmt over the past several months. Brazil always seems to have more soybeans left over at the end of the marketing year, even as exports exceed expectations.
USDA also bumped its China soybean import total for the 2022-23 marketing year to 104 mmt, up from 100.85 mmt the previous month, even though the February number better matched Chinese customs data. USDA went on to raise its 2023-24 import estimate to 105 mmt, up from 102 mmt, while leaving domestic crush unchanged at 98 mmt, up just 2 mmt from the previous year. That puts projected China ending stocks for the 2023-24 marketing year at 37.58 mmt, up 49% over the past two years, confirming what I’ve been saying about China building its reserves. If verified, that would mean that China will have added 457 million bushels to its soybean reserves over a two-year period, bringing them to 1.38 billion bushels, or enough to avoid importing any soybeans from the United States if a conflict were to arise between the two countries that stopped shipments from the United States, especially with Brazilian production expanding at a faster pace than previously believed. On another note, USDA confirmed this morning that China cancelled another 9.7 million bushels of U.S. soft red winter wheat purchases, on top of the four cargoes that it canceled last week. Total cancellations by China now total 18.5 million bushels. USDA cut 15 million bushels from its wheat export target on Friday, including 5 million hard red winter and 10 million bushels of soft red winter wheat. This suggests more cuts coming.
