Perspective: Morning Commentary for December 14

By: Arlan Suderman, Chief Commodities Economist

Tue, 14 Dec 2021, 14:09

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

December 14 – Stocks are focused on inflation this morning, as well as how that might impact decisions in the Federal Open Market Committee meetings that start today, and that conclude tomorrow with a revised monetary policy statement. Stocks came under selling pressure following release of the inflation data. The VIX is trading near 22 this morning, reflecting elevated concern on Wall Street. The dollar index is trading near 96.2, while yields on 10-year Treasuries are trading near 1.44%. Crude oil prices are 1% lower this morning, reflecting a broader weakness in the commodity sector ahead of tomorrow’s Fed statement.

Inflation is hotter than expected and continuing to heat up at the producer level, which means that we can expect more inflation pressures at the consumer level as well. Inflation at the consumer level is already at 39-year highs, with today’s producer price index raising concerns that we may go higher. The PPI rose 0.8% month-on-month in November, up from 0.6% in October and up from analyst expectations of 0.5%. The PPI was up 9.6% year-on-year in November, up from 8.6% in October and exceeding analyst expectations of 9.2%. The core PPI that excludes the more volatile food and energy sectors was also hot, rising 0.7% month-on-month, up from 0.4% gains in October and exceeding analyst expectations of 0.4%. Core PPI rose 7.7% year-on-year in November, up from 6.8% in October and exceeding analyst expectations of 7.2%.

Many people want to blame inflation on volatile energy prices, but today’s data shows that we have systemic inflation that goes well-beyond volatility in the energy sector. Are energy prices a contributor? Absolutely, they are a contributor. But current inflation pressures are far more systemic than that. They are a product of unprecedented stimulus over the past couple of years that artificially elevated consumer demand at a time when production and transportation were restricted due to covid. The elevated demand would have provided a challenge even if those sectors were not restricted, but they were. That demand remains elevated due to the massive supply of cash still in the system. As such, the only way to ease these inflation pressures is to extract some of that cash from the system, and that will include some pain. The greater the inflation momentum that needs to be slowed, the greater the pain needed to stop it. Inflation at the producer level is still half the level it was four decades ago when Paul Volker took drastic actions to push interest rates toward 20%, but we’re still on that path.

It will be imperative that the Fed act in this week’s meeting, and that it act responsibly. Otherwise, we could see a dramatic market response tomorrow when the Fed’s statement is released. I’ve been warning of this approaching problem all year, hoping that I would be wrong. Unfortunately, I was not. The good news is that it appears that inflation finally has the full attention of Fed Chair Jerome Powell, based on his comments earlier this month to the Senate Banking Committee. Powell was the Dove to get nominated for another four years at the helm of the Fed, but he is now pivoting hawkish to get his nomination confirmed in the Senate.

China reported 51 new locally transmitted COVID cases yesterday, including 44 cases in Zhejiang, 5 in Inner Mongolia, 1 in Heilongjiang and 1 in Shaanxi. Guangzhou reported China’s second case of the Omicron variant. The patient reportedly entered China on November 27, and repeatedly tested negative for Covid-19 during his 14 days in quarantine. He then flew from Shanghai to Guangzhou on December 11 and was sent to his home for home quarantine on December 12. That’s where he tested positive for the Omicron strain on December 13. This is a problem for China’s zero-tolerance policy toward Covid-19. Perhaps the patient contracted Omicron on his flight home following the 14-day quarantine, but that means the Omicron variant is out there undetected somewhere in China. Perhaps he had it and failed to test positive for 14 days, but that suggests that China may need to extend its quarantines even further. The challenges to maintain the zero-tolerance policy in China continue to grow, creating increasing headwinds for its economy. However, opening the door now would also create huge challenges for China’s healthcare system – let alone its economy.

Commodities are monitoring the outside markets. A rise in fear in the outside markets tends to bring money out of the commodities to the sideline, even if they have supportive fundamentals. Longer-term, commodity prices tend to follow inflation numbers higher, although it isn’t necessarily universal for all commodities. Little has changed fundamentally for the Ags, but the environment in which they trade has changed in the near-term.

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