December 11 – Stock futures were again mixed ahead of this morning’s inflation data, and ahead of next week’s meeting of the Federal Reserve. Stock futures rallied and the dollar followed Treasury yields lower following the data release. The VIX is back trading below 14, while the dollar index is trading near 106.5. Yields on 10-year Treasuries are trading near 4.21%, while yields on 2-year Treasuries are trading near 4.11%. Crude oil prices are more than 1% higher on hopes that Chinese stimulus will increase demand for energy, while the grain and oilseed sector is mixed to higher following yesterday’s big USDA crop report.
The consumer price index rose 0.3% month-on-month in November, matching expectations, but rising from 0.2% the previous month. The headline CPI rose 2.7 year-on-year in November, again matching expectations, but ticking upward from 2.6% the previous month. The core CPI that excludes the more volatile food and energy sectors rose 0.3% month-on-month, matching market expectations, and matching the previous month’s pace. Core CPI rose 3.3% year-on-year, again matching both expectations and the previous month. Wall Street celebrated today’s numbers, since they matched expectations, even though they failed to make additional progress toward the 2% mandate. In fact, the headline numbers inched higher, but as expected. Tomorrow’s producer price index data is expected to show an even larger uptick in inflationary pressures at the wholesale level. Yet, Fed fund futures traded 98% odds following this morning’s data release that we’ll see a 25-basis point rate cut from the Federal Reserve next week, up from 89% odds the previous day. They continue to trade expectations that we’ll see a total of three more rate cuts between now and next June’s meeting.
A breakdown of today’s data shows that transportation services finally saw a flat month without inflation. That’s the category that contains rapidly rising auto insurance rates. Electricity prices also declined 0.4% month-on-month, while medical care commodities dropped 0.1%. But food inflation returned in November, with food at home rising 0.4% on the month, while food away from home rose 0.5%. Gasoline prices rose 0.6%, as did fuel oil prices, while natural gas prices rose 1.0% on the month. We also saw a return of inflation pressure in vehicle costs, with new car prices rising 0.6% on the month, while used car prices rose 2.0% month-on-month after rising 2.7% the previous month. Many of these areas of rising inflation pressures were a product of rising consumer sentiment, as I’ve previously cited the example of strong demand for prime rib steaks that has driven prices higher.
Chinese President Xi Jinping is proactively fighting the anticipated coming tariffs from the incoming Trump Administration. He’s reportedly met with leaders of 10 major international economic institutions in recent weeks, including the World Bank and the International Monetary Fund. Xi commented that “there will be no winner in a tariff war or tech war between China and the U.S.,” while vowing that Beijing stands ready to defend China’s interests firmly. This rhetoric is meant to serve two purposes. First, it keeps Xi looking strong at home. Second, it helps him to posture for the coming anticipated negotiations with the incoming Trump Administration. In fact, there are unconfirmed reports that Xi and President-Elect Donald Trump have already had a conversation in recent days to discuss the issues, just as also occurred with Canada’s Prime Minister Justin Trudeau and Mexico’s President Claudia Sheinbaum. It hasn’t taken long for the tariff threats to bring these leaders to the table – long before Trump’s inauguration day. None of these countries can afford a tariff war, although the risk of such will keep all of us nervous until agreements are reached, as we do significant amounts of commodity trading with each of the above countries.
USDA’s December WASDE crop reports are typically quite boring. But USDA stepped out of character yesterday in making some aggressive changes for a December report to key balance sheets. It downwardly revised U.S. 2025 beef production by a sharp 615 million pounds, which is nearly 2.5% of production, on the assumption that our border with Mexico will remain closed to feeder cattle moving north to U.S. feedlots indefinitely due to issues surrounding the New World Screwworm and/or tariff battles, which is quite contrary to industry expectations. USDA increased U.S. corn exports by 150 million bushels, while increasing ethanol corn use by another 50 million bushels, dropping 200 million bushels off ending stocks. Both can be justified, but USDA’s normal tendency would have been to make these cuts a bit more gradually – especially the increase in exports – to give time to make sure that the demand was simply front-loaded buying at multi-year prices. USDA also increased Brazil domestic corn use by nearly 80 million bushels, with global stocks falling by more than 300 million bushels. U.S. corn stocks fell by 200 million bushels, but USDA made no change to its estimated marketing year average cash price, leaving it at $4.10 per bushel. It made no change to its U.S. soybean balance sheet, but it slashed its marketing year average cash price by 60 cents to $10.20 per bushel, which is down $4 per bushel over the past two years.
