September 13 – It’s all about inflation and retail sales the next couple of days, with today’s focus on inflation at the consumer level, while we’ll get inflation data at the wholesale level tomorrow, along with retail sales data. Those numbers provide the final pieces needed for the Federal Reserve to make its decisions about monetary policy when the Federal Open Market Committee meets next week on Tuesday and Wednesday. The VIX is trading near 14 this morning, while the dollar index is trading near 104.8. Yields on 10-year Treasuries are trading near 4.29%, while yields on 2-year Treasuries are trading near 5.01%. Crude oil prices are modestly higher after setting fresh 10-month highs, while the grain and oilseed markets were mixed to higher overnight.
The August headline consumer price index rose 0.6% month-on-month, matching analyst expectations, but triple the 0.2% gain seen in July. The headline CPI was up 3.7% year-on-year in August, up from analyst expectations of 3.6%, and up from 3.2% the previous month. But the market surprise was in the core CPI numbers that exclude energy and food prices. The market expected to see higher energy prices show up in the headline numbers, but it expected the core numbers to continue to see improvement. That didn’t happen. Core CPI rose 0.3% month-on-month in August, up from analyst expectations that it would remain unchanged at 0.2% gains. The core CPI was up 4.7% year-on-year in August, matching the previous month, and significantly above analyst expectations that it would fall to 4.3%. However, that 4.7% proved to be a misprint, and was soon corrected, leading to a market flip.
It's no surprise to anyone who purchased gasoline over the past month that its price index rose 10.6% month-on-month in August, with fuel oil up 9.1% on the month. The entire energy complex rose 5.6% month-on-month, yet it still remains below year ago levels. The only real decline in prices in August to offset this big increase came from a 1.2% decrease in used car prices during the month, which are now down 6.6% year-on-year. Shelter price inflation continued to cool as well, slipping to 0.3% month-on-month gains, down from 0.4% the previous month. But medical care commodity prices rose 0.6% month-on-month, while transportation services rose 2.0% on the month and 10.3% year-on-year. New vehicle prices were also up 0.3% on the month, reversing their recent trend toward discounts, suggesting that consumers are once again looking to trade in their used care for a new one. Wall Street’s reaction to today’s reflected a “glass is half full” sentiment. The dollar followed Treasury yields higher when the data was initially released, leading to a selloff in stock futures. But that response quickly reversed as traders broke down the above numbers and realized that the core year-on-year number correction left things trending in the right direction. The market still believes that there is just over 40% odds of one more rate hike in November, with rate cuts then coming by the second quarter of next year. Next, we’ll see if tomorrow’s producer price index and retail sales data is able to change market sentiment heading into next week’s meeting.
“Resolving the Taiwan question and achieving the complete reunification of the motherland is the unswerving historical task of the Communist Party of China,” according to policy guidance issued by the Chinese government on Tuesday. The document outlined Beijing’s blueprint for future development of Taiwan. It intends to set up a demonstration zone in Fujian, which is the closest province to Taiwan on the Mainland, as a place where Taiwanese people can come to study, work, and settle down, and where the government promises to treat them equal to its residents. The escalating tensions between China and the West on the Taiwan issues appears to have sped up China’s resolve to settle the issue – choosing to seek a peaceful reunification as its first step. Its hope appears to be that this initiative will positively impact public opinion among the Taiwanese people, encouraging them to see reunification without military conflict. Such an outcome would undermine the West’s motive for intervening.
USDA’s WASDE crop report provided little to nothing for the bulls on Tuesday. Yes, it lowered its corn and soybean yields, but no more than expected. Furthermore, acreage increases for corn and demand cuts for soybeans largely offset the yield declines, leaving ending stocks adequate to meet anticipated demand. It’s ironic that USDA lowered soybean demand and not corn, because corn has the greater argument for weaker demand. That means that it has the highest probability of seeing lower demand numbers next month when yields are expected to be lowered once again. It’s really difficult to see a scenario at this point where corn stocks fall to levels where they’ve been over the past year, while the odds are increasing the soybeans could do so.
