August 11 – Stock futures had a softer tone to them overnight after yesterday’s rally fell flat late in the session as traders looked deeper into this week’s inflation data. The VIX is trading near 16 this morning, while the dollar index is trading near 102.7. Yields on 10-year Treasuries are trading near 4.14%, while yields on 2-year Treasuries are trading near 4.89%. Crude oil prices are firmer this morning on solid demand forecasts, while the grain and oilseed sector was mixed to weaker overnight as traders complete positioning for today’s USDA crop report.
The producer price index came in slightly hotter than expected this morning. The PPI rose 0.3% month-on-month in July, up from 0.1% the previous month, and above analyst expectations that it would rise to 0.2%. The headline PPI rose 0.8% year-on-year in July, up from 0.1% in June and up from analyst expectations of 0.7%. But the core PPI that excludes the more volatile food and energy sectors was flat in July, suggesting that the gains in the headline number were largely due to escalation primarily in energy prices. Today’s flat core PPI number compares to 0.1% month-on-month gains in June and to analyst expectations of 0.2% gains. The core PPI rose 1.9% year-on-year in July, down from 2.4% the previous month and below analyst expectations of 2.3%.
Yesterday’s consumer price data did not yet reflect the July price increases due in the energy sector that I believe are coming, but today’s PPI numbers do so. The CPI still reflects sticky inflation in the service sector due to wage inflation that is not fully reflected in the PPI data. Both now will be susceptible to possible future commodity inflation. Crude oil has already shown that tendency, while the food-based commodities are monitoring developments in the Ukraine war to see if they’ll join the energy sector in pushing higher. Longer-term demand for energy is still in question, depending on the economy. But several factors continue to chip away at the supply side of the balance sheet to tighten it up regardless of demand. It's too soon to say to what extent we might see a rebound in inflation, but I remain confident that we’re a long way from getting back down to 2%. Keep in mind that the Fed said it was targeting a “long-time average of 2%,” so it can always say that it’s getting close due to the years that we were below it, but I don’t think we’re close to that point yet. I continue to expect “higher for longer” with sticky inflation.
China Direct, published by our Shanghai office, points out that China’s severely low birth rate has once again become a headline in that country. A Chinese academician warned that the number of babies born in China this year may fall to between seven to nine million. That’s more than a 40% drop in the number of babies born over the past five years. China’s population is a key problem that undermines the country's growth potential, but more significantly, it’s relevance economically and militarily. Chinese authorities ramped up supporting measures to boost women’s fertility this year, but they have not yet found an effective way to stimulate population growth in China. As a result, this is not only a permanent drag on China’s economy but also sets a strong bearish bias for China’s short-term stimulus in household spending, including properties, while also having longer-term implications for commodity demand in China.
Politically and economically, it suggests that China’s survival hinges on its ability to expand its borders. Thus far, it’s doing so figuratively through the Belt and Road Initiative, but that has thus far fallen far short of the lost revenue from Europe and the United States as they decouple from China. Stimulus efforts have thus far fallen far short. New data shows that new bank loans in July totaled just 345.9 billion yuan (US$48 billion), down from the expected 800 billion, below the 679 billion during Covid lockdowns a year ago, down from 3.05 trillion yuan in June, and the lowest monthly total since November 2009. Both household mortgage and corporate loans saw sharp drops in July reflecting rapidly deteriorating confidence in the economy. Chinese stimulus helped boost M2 money supply by 10.7% year-on-year, but that has not yet had a material impact on the economy.
Today’s focus will be on USDA’s August WASDE crop report. The August report sets the bar for the current year corn and soybean production expectations based largely on its farmer survey, collaborated with satellite data. All the major corn producing states have NDVI satellite readings at or above average except Iowa and Missouri, which are slightly below average. As such, it will be interesting to see how USDA weights that with farmer survey returns. The debate will then switch to how August weather is impacting those totals ahead of the September report, which will include actual field sampling. USDA must address the next year’s weak demand outlook at some point.
