February 12 – Inflation data intermingled with tariff talk today, which is expected to be the story tomorrow as well. Stock futures dropped as Treasury yields surged on the inflation data release this morning, as traders worry about a return of higher prices again. We’ll also hear from Federal Reserve Chair Jerome Powell as he testifies before the House Financial Services Committee today. His testimony was expected to mirror yesterday’s testimony before the Senate Banking Committee, but I anticipate that it will change somewhat following today’s inflation numbers. The VIX rallied to trade near 17, while the dollar index followed Treasury yields higher to trade near 108.4. Yields on 10-year Treasuries are trading near 4.64%, while yields on 2-year Treasuries are trading near 4.36%. Crude oil prices are 1% lower, adding to their losses as Treasury yields rose this morning, while the grain and oilseed sector posted modest follow-through losses following yesterday’s disappointing USDA WASDE crop report.
The headline consumer price index rose 0.5% on the month in January, up from 0.4% in December and beating analyst expectations that it would fall to 0.3%. The headline CPI rose 3.0% year-on-year in January, beating analyst expectations that it would hold steady at 2.9%. The core CPI that excludes the more volatile food and energy sector rose 0.4% on the month in January, doubling the 0.2% rise seen in December, and exceeding analyst expectations of 0.3% growth. The core CPI rose 3.3% year-on-year in January, up from 3.2% in December and exceeding analyst expectations that it would slip to 3.1%.
It's not unusual for inflation expectations to rise in the first quarter of the year, when many companies adjust their price structure, as well as increase their wage schedule. However, this morning’s CPI numbers caught many in the marketplace by surprise. Yes, it reflected higher energy prices, which should have been expected, but it also revealed rising price pressure in other areas of the economy as well. Gasoline prices rose 1.8% on the month in January, after rising 4.0% in December. But fuel oil prices rose 6.2% month-on-month in January, nearly tripling the 2.1% rise seen in December. Natural gas prices rose 1.8% on the month, after rising 2.8% the previous month. Food prices rose 0.4% on the month, led by a 0.5% rise in the cost of consuming food away from home. Used car and truck prices rose by 2.2% on the month as consumer nerves rose, leading them to favor the more economical used car market over the new car market. Medical care commodities added 1.2%, while transportation services rose 1.8% month-on-month. The only negative category was apparel, which dropped 1.4% on the month. We’ll get the producer price index data tomorrow, but today’s data again raises fears of reinflation, and the impact of tariffs should not have even been much of a factor for the January data collection.
President Trump’s trade advisory team is said to be putting the final touches on his plan to implement reciprocal tariffs, with an announcement possibly coming as soon as today, although there are now indications that the announcement may be delayed until later this week. This means that the United States would essentially match the tariff rate that any other country currently has on us. This is on top of the 25% tariff on all aluminum and steel imports that Trump announced on Monday. The European Commission has already indicated that it will retaliate for any increased tariffs on it, although Europe’s economy already has enough problems of its own. The market expectation is that the higher cost of these tariffs will eventually reach the consumer, putting further upward pressure on re-inflation pressures in the U.S. economy, which is another reason why the Federal Reserve is reluctant to make additional interest rate cuts at this time. We saw from this morning’s CPI data that re-inflation is already a concern before the tariff factor comes into play, which is something that we’ve been warning about for months. The tariff factor simply adds to that. The question then comes on whether Trump’s tariffs will be successful enough in raising revenues to offset the upward pressure on interest rates that comes from our current rising fiscal debt problem? Will the added revenues reduce the need to sell such a large volume of debt certificates going forward? Of course, that will also be impacted by the effectiveness of the Department of Government Efficiency work headed by Elon Musk. Don’t rule out the possibility of a Fed rate hike later this year as well.
USDA cut South American corn and soybean production yesterday, while also cutting Chinese corn and wheat imports. But the disappointment for the trade was that none of the production cuts in South America resulted in increased demand for U.S. corn and soybeans, leaving those domestic balance sheets virtually unchanged. The bulls lacked fresh fodder for the day, translating into an opportunity for them to take some profits. Bulls need to be fed every day, and USDA failed to provide any fresh fodder for them on Tuesday. The focus now will be on the ongoing growing season in Argentina, along with the Brazil winter corn crop growing season. But we’ll also be focusing more on planting intentions in the U.S. Midwest, with expectations that corn will gain acres in 2025.
