August 10 – Stocks are pointing higher this morning following the release of the July consumer price index data. The VIX is trading back below 15 this morning, reflecting Wall Street’s belief that this morning’s data gives the Federal Reserve the green light to pivot its interest rate policy next year, with cuts coming as early as the March meeting. The dollar index is trading near 102.2 at this hour as it follows Treasury yields lower. Yields on 10-year Treasuries are trading near 3.99% currently, while yields on 2-year Treasuries are trading near 4.78%, although they are now rebounding again. Crude oil prices are posting modest losses currently, after posting fresh nine-month highs overnight. The grain and oilseed sector posted modest gains overnight as traders square their positions ahead of tomorrow’s big USDA WASDE crop report, while monitoring rising tensions in the Black Sea.
The headline CPI rose 0.2% month-on-month in July, matching analyst expectations, and matching the previous month’s gains. The CPI rose 3.2% year-on-year in July, coming in better than analyst expectations of 3.3%, although still up from 3.0% the previous month. The core CPI that excludes the more volatile food and energy prices also rose just 0.2% month-on-month, matching analyst expectations and matching the previous month. The core CPI rose 4.7% year-on-year in July, down from analyst expectations that it would remain at 4.8%. Wall Street celebrated these numbers on expectations that the Fed will see them as confirming that we are on the right path toward a pivot in rates in the months ahead. Fed fund futures are trading just 30% odds of a 25-basis point rate hike at the November meeting, with expectations that we’ll see the first of several rate cuts as early as March.
A breakdown of this morning’s CPI numbers shows how we got to the above numbers, but they also raise a few questions. Food inflation seems to be calming down, with month-on-month gains of 0.3% for food consumed at home and 0.2% gains for food consumed away from home. Shelter costs rose 0.4% month-on-month in July, but they too are trending in the right direction. Services less energy rose 0.4% month-on-month, which is consistent with where that sector has been for the past four or five months. Used car prices fell 1.3% in July, while new-car prices fell 0.1%. Electricity costs fell 0.7% month-on-month in July. The headlines in July focused on areas of the country experiencing extreme heat, but they failed to mention that most areas of the country saw milder temperatures that reduced their cooling bills. Medical care commodities rose 0.5% on the month, providing upward pressure on the core CPI number. Fuel oil prices rose 3.0% month-on-month, but they remain down 26.5% year-on-year. The surprise to me was that the government showed gasoline prices up just 0.2% month-on-month in July. Anyone fueling their car in recent weeks knows that gasoline prices have gone up much more than that, but apparently there is a delay in the price increase showing up in the CPI data, which means we can expect a larger increase in the August data when it is printed next month.
First-time claims for unemployment benefits rose to 248K in the week ending August 5, up from analyst expectations of 229K, and up from 227K the previous week. That pushed the four-week moving average to 231K, up from 228.25K claims the previous week. Continuing claims in the week ending July 29 fell by another 8K to 1.684 million. The four-week moving average for continuing claims fell 9,250 to 1.701 million. The weekly jump in claims caught the attention of traders, suggesting that the tight labor market is starting to loosen a bit, falling in line with the Fed’s objective of easing wage inflation. But it’s just one week’s data, and the numbers overall remain tight.
Ukraine worked with the International Maritime Organization to create a temporary safe corridor for cargo ships, it announced today. The routes will be used primarily to allow ships trapped at ports not covered by the Black Sea Grain Initiative to finally leave those ports after being trapped there since February 2022. The ships will have cameras on them to prove their peaceful intents. The IMO’s involvement provides a sense of protection under international maritime law, although Ukraine clearly states that risks remain from mines in the water as well as possible Russian strikes. All eyes will now be on Russia’s response to the ships moving through these corridors.
Today’s primary focus at this time is tomorrow’s USDA WASDE crop report, barring any fresh headlines from the Black Sea. The August report is known for its market-moving surprises from USDA, with the bulk of the focus being on USDA’s yield estimates. However, look for USDA to also bump Brazil corn production again, while cutting U.S. corn exports. The demand side of the balance sheet should get greater attention later this fall.
