October 12 – Stock futures were cautiously higher overnight ahead of this morning’s key inflation data, as traders digested the minutes of the latest Federal Open Market Committee meeting that were released Wednesday afternoon. They rallied, and then slipped lower following the data release. The VIX slipped to a nearly two-week low below 16, while the dollar index is trading near 106.1. Yields on 10-year Treasuries are trading near 4.62%, while yields on 2-year Treasuries are trading near 5.07% level. Crude oil prices are bouncing nearly 2% higher after recent weakness, while the grain and oilseed sector traded mixed to higher ahead of today’s highly anticipated USDA WASDE crop report.
The consumer price index rose 0.4% month-on-month in September, down from 0.6% the previous month, but above analyst expectations of 0.3% growth. The headline CPI rose 3.7% year-on-year in September, matching the pace seen in August, but up from analyst expectations of 3.6%. The core CPI rose 0.3% month-on-month, matching the previous month’s pace and matching analyst expectations. The core CPI rose 4.1% year-on-year in September, down from 4.3% in August, but matching analyst expectations. It’s that last number that the markets initially focused on this morning, providing a sense of cautious optimism that the recent dovish tone heard from members of the Federal Reserve may be allowed to take root, although the weekly jobless numbers did little to support that, curbing the enthusiasm first seen after the inflation data was released.
The headline inflation number reflected rising energy prices in September as expected, which broke hard when the calendar turned to October. All energy prices rose 1.5% month-on-month in September, while they remain down 0.5% year-on-year. Gasoline prices rose 2.3% month-on-month and 2.2% year-on-year. Fuel oil rose 8.5% month-on-month, but they remain down 5.1% year-on-year. That was partially offset by a 1.9% monthly decline in natural gas prices, which remain down 19.9% year-on-year. But commodities less food and energy fell 0.4% during the month, and they remain even with the previous year. New vehicle prices rose 0.3% during the month, while used car prices fell 2.5%. Services less energy services rose 0.6% during the month and are up 5.7% year-on-year. Shelter costs are also up 0.6% on the month and up 7.2% year-on-year. Transportation services rose 0.7% on the month and 9.1% on the year. Much of the service sector remains in inflationary mode due to high labor costs.
First time claims for unemployment benefits remained unchanged at 209K in the week ending October 7, which also matched analyst expectations. That allowed the four-week moving average to slip lower to a historically low 206.25K claims, down from 209.25K the previous week. Continuing claims for the week ending September 30 jumped to 1.702 million, up 30,000 from the previous week, which was also revised upward by 8,000. The four-week moving average for continuing claims rose 4,750 to 1.674 million. These are historically low numbers, but the 30,000 jump in continuing claims is one that we’ll need to watch for signs of a loosening labor market. Yet, Wall Street is focused on the low weekly number of 209K claims that seems to be a trend in recent weeks, suggesting that the labor market remains tight, supporting on-going wage inflation, which shows up in what the Fed calls “super-core” inflation – services minus shelter.
Minutes of the September Fed meeting were released Wednesday afternoon, reflecting a shift in sentiment. A growing number of policymakers are concerned about the uncertainties of the economy and rising commodity prices, while still supporting at least one more rate hike at the latest meeting. Yet, these same policymakers indicated that the financial markets are tightening, doing some of the work for them as yields on longer-term Treasuries trend higher, “supporting the case for proceeding carefully” before raising rates again. Wall Street traders saw that as indication that the Fed is moving much closer to a pause, although any talk of a pivot in policy was cooled by talk in the minutes of shifting the discussion toward holding rates high rather than pushing them higher. As such, the Fed may be more open to the idea of an extended pause, but rate cuts still appear to be down the road at this point. That said, Fed fund futures trading increased the odds of another rate hike by January to 41%, up from 27% yesterday, based on this morning’s inflation and jobs data.
Today’s USDA WASDE crop report will set the tone for the grain and oilseed markets for much of the remainder of the calendar year. The corn and soybean yield estimates will be particularly watched. This is a case where matching the pre-report trade estimates might be considered bearish if the trade sees the South American crop on pace for good yields. But any potential changes in U.S. export targets will also set the tone, with the line-up of corn and soybean cargoes for loading remaining disappointing, especially at Gulf ports due to low water levels on the Panama Canal. USDA may choose to wait until November to make those changes, but they’re likely coming. China updated its crop report today, raising this year’s corn crop to 288.2 million metric tons, up 11 mmt from USDA’s latest estimate, with local estimates tending to be another 4 to 9 mmt higher yet, reducing the need for significant imports this year.
