August 9 – Stock futures have a mixed tone to start the day, after successfully rallying from early losses on Tuesday to finish near session highs. Bank stocks are less of a focus today, while the trade looks ahead to tomorrow’s highly anticipated inflation data amid hopes and expectations that the data will support an earlier pivot in its interest rate policy by the Federal Reserve. The VIX is trading below 16 this morning, reflecting easing concerns on Wall Street. The dollar index is trading near 102.4, as it remains just below one-month highs. Yields on 10-year Treasuries are trading near 4.03%, while yields on 2-year Treasuries are trading near 4.77%. Crude oil prices pushed 1% higher to fresh nine-month highs this morning, while the grain and oilseed markets were mixed.
Tomorrow morning’s headline consumer price index is expected to rise 0.2% month-on-month for July, matching the previous month’s gains, reflecting a relatively modest pace of inflation. That’s what analysts expect. The headline year-on-year number is expected to show a 3.3% inflation pace, up modestly from 3.0% the previous month. Core inflation is expected to remain unchanged from the previous month at a 0.2% month-on-month gain and a 4.8% year-on-year gain. The Fed will not be happy with a stagnant core inflation rate at 4.8%, based on its previous comments, but the trade is choosing to look past that, as it has for much of the past 18 months. It’s interesting to see the average analyst estimates so low, considering that the Cleveland Fed’s inflation nowcaster puts both the headline and core CPI rate up 0.4% month-on-month for July. It pegs the year-on-year pace at 3.4% for the headline number and 4.9% for the core inflation rate that excludes the more volatile food and energy prices. I don’t know if the Cleveland Fed’s model will be correct tomorrow, but it has a decent track record, and its numbers suggest the increased possibility of a surprise in tomorrow’s numbers to the upside.
Contrarily, China is officially in a period of deflation, according to today’s edition of China Direct from our Shanghai office, which raises additional concerns about the health of its economy. China’s CPI rose 0.2% month-on-month in July, but it was down 0.3% year-on-year, signaling a period of deflation over the past year. The month-on-month gains reflect a seasonal uptick in holiday spending by consumers this summer. The core CPI that excludes food and energy remained positive, rising 0.8% year-on-year, but that was far below the 3% target set by the government at the beginning of the year. Holiday driven entertainment and travel provided the biggest boost for prices over the past month, rising 1.3% month-on-month. Gains were more modest for rental prices, which rose 0.1%. Similar gains were seen for medical care, while clothing prices fell 0.3% on the month, and food and beverage prices dropped by 0.6% on the month. Analysts worry about a deeper contraction once holiday related expenses fade. China’s producer price index ex-factory fell 4.4% year-on-year in July, after falling by 5.4% in June. China’s PPI was down for the eighth consecutive month in June. Much of the decline is tied to China’s declining demand for exportable goods as Europe and the United States decouple from China. A recent media interview with European Commission Executive Vice-President and Trade Commissioner Valdis Dombrovskis raised fears in China that Europe may be considering similar tactics to what former President Trump used in his trade war aimed at narrowing the trade deficit with China. As such, policymakers are trying to stimulate domestic consumption to prop up the economy but making the shift from an export-based to a consumption-based economy is a tough transition to make.
Wheat prices are weaker this morning amid the absence of any fresh supportive headlines from the Black Sea. That allows traders to focus on weak demand for U.S. wheat as Russia continues to dump record amounts of cheap wheat on the world market. Corn and soybean prices moved higher overnight. That doesn’t necessarily mean that traders are bullish the row crops, but rather that they are consolidating prices following recent losses, when November soybeans lost more than $1.50 per bushel of value and December corn took off more than 80 cents. November soybeans failed to find significant sell-stops below the 100-day moving average on Tuesday, with traders reluctant to go lower ahead of seeing USDA’s updated yield estimates on Friday, while traders were reluctant to take out key chart support near $4.90 for December corn before seeing Friday’s crop report as well. USDA said Tuesday that it will update small grain harvested acreage in Friday’s report, while doing so for corn and soybeans in September. The expectation is that we’ll see another reduction in winter wheat harvested acres due to high abandonment rates in the western Plains that exceeded early expectations, but that will likely be offset by another increase in yield. How the two offset each other will be the key question. The trade expects USDA to drop its corn yield by 2 bushels to 175.5 bushels per acre, while dropping the soybean yield by 0.7 bushel to 51.3 bpa.
