August 13 – The focus returned to inflation this morning as traders received data on inflation for July at the wholesale level, with consumer level inflation data expected tomorrow. Meanwhile, data shows a return toward optimism among small business leaders. Stocks responded positively to this morning’s numbers, which show that we’re reversing the recent trend toward rising wholesale inflation. The VIX is trading near 20 this morning, while the dollar index is trading near 103.0. Yields on 10-year Treasuries are trading near 3.86%, while yields on 2-year Treasuries are trading near 3.97%. Crude oil prices are trading quietly mixed this morning, while the grain and oilseed markets were mixed to weaker overnight, led by double-digit losses for soybeans.
The headline producer price index rose 0.1% month-on-month in July, down from 0.2% growth the previous month, and down from analyst expectations of 0.2% growth. The headline PPI grew 2.2% year-on-year in July, down from an upwardly revised 2.7% the previous month, and down from analyst expectations of 2.6%. The core PPI that excludes the more volatile food and energy sectors was flat month-on-month in July, which was down from a downwardly revised 0.3% the previous month, and down from analyst expectations of 0.2%. The core PPI was up 2.4% year-on-year in July, down from 3.0% the previous month, and down from analyst expectations of 3.0%. The primary factor exerting upward pressure on wholesale inflation in July was energy prices.
The NFIB small business optimism index rose to 93.7 for July, up from 91.5 the previous month, and above analyst expectations of 91.7. The index shows that small business optimism is creeping higher at a time when Wall Street is worried about recession. Small businesses are the heart and soul of our economy. That said, small businesses indicated that their top concern continues to be inflation. So, while we’re continuing to see the data show an erosion of inflation, small businesses are still seeing the seeds of it, which is why the Federal Reserve needs to be cautious about not over-reacting with its rate cuts. Rate cuts are looking much more likely now, but the Fed needs to be careful not to be overly aggressive in doing so, as Wall Street would like it to be, based on Fed fund futures trading currently.
Fed fund futures trading currently gives better than 50% odds that we’ll see a 50-basis point rate cut in September, with 100 basis points taken off by the end of the year. That would be tremendously stimulative for the economy, but Wall Street wants even more than that as we head into next year, even though there is a host of data that argues against us moving into a recession. Restaurant bookings are strong, as is TSA travel data. Tax withholdings show few signs of a recession. We’ll get updated monthly retail sales data on Thursday, but thus far the weekly data shows few signs of a recession. Hotel occupancy rates remain strong, and weekly jobless claim data remains within the range of what would be considered normal for this time of year. It’s trending softer, but definitely these numbers do not reflect a recession. Broadway show attendance is strong, and box office weekly gross sales are higher than normal. Furthermore, firms are speaking less and less of recession in earnings calls.
Yet, the Fed still has a significant unspoken problem. One of the challenges working against the Fed is the rapid growth of our national debt, which is now more than $35 trillion. Over the weekend, the annual cost of servicing our nation’s debt surpassed what we spend for national defense and various military conflicts around the world. That’s unsustainable. The current cost to service our nation’s debt is $917 billion, topping the $916 billion that we spend on national defense and other military costs. The total is rapidly rising toward the $1 trillion mark. The government takes in $4.989 trillion in federal tax revenue each year. But we spend more than $5 trillion on four key mandated areas of spending that includes a) Medicaid / Medicare, b) Social Security, c) national defense, and d) servicing our nation’s debt. We use all of our federal tax revenues on the above four categories, and that’s not enough. That means that we have to borrow money for Homeland Security, Education, food programs, agricultural programs, etc. This is starting to stifle economic growth, putting a squeeze on gross domestic product.
USDA raised corn, soybean and wheat yields on Monday. It partially offset that with reductions in harvested acreage for corn and wheat, but it raised soybean acreage by a million acres. That put soybeans on the short end of inter-market spreads following the report’s release, with projected 2024-25 ending stocks approaching 600 million bushels. The job of the market now is to take prices to levels that will discourage planting in Brazil next month. The planting season in Brazil starts in early September, or whenever the dry season ends for the region after that time. La Nina is still very slow to develop, leading to difficulty in forecasting weather trends for the region with any significant sense of confidence. In the meantime, August weather suggests more upside risks for U.S. yields.
