January 31 – Tariffs are the talk on Wall Street to close out the week and the month, with President Trump’s looming target date of applying hefty punitive charges on imports coming from Canada, Mexico, and China coming tomorrow unless those countries agree to his terms for stopping the flow of illegal migration and drugs across U.S. borders, and he’s now adding trade deficits to the discussion as well. Stuck in the middle of this, as if an interruption of sorts, is this morning’s inflation data release. The VIX is trading near 15 this morning, after falling to its lowest level in a week, while the dollar index firmed to trade near 108.3. Yields on 10-year Treasuries are trading 4.52%, rallying and then falling on this morning’s inflation data, while yields on 2-year Treasuries are trading near 4.21%. Crude oil prices are mixed, while the grain and oilseed markets came under active selling pressure overnight.
Personal income rose 0.4% on the month in December, matching analyst expectations, but up from 0.3% growth in November. Personal expenditures rose 0.7% month-on-month in December, up from expectations of 0.5% growth, and up from 0.4% the previous month. That fits with yesterday’s GDP report, showing a notable increase in consumer spending in the fourth quarter as consumer sentiment rallied following the election, at least until it pulled back somewhat in January. The headline PCE price index rose 0.3% on the month in January, again matching analyst expectations, but that was also up from a 0.1% rise in November. The PCE price index rose 2.6% year-on-year in December, matching expectations, but again up from 2.4% the previous month. The core PCE price index that excludes the more volatile food and energy sectors rose 0.2% on the month in December. You guessed it – that matched expectations, but it was still up from 0.1% the previous month. The core PCE price index rose 2.8% year-on-year in December, matching expectations, and matching the previous month’s pace.
So, consumer spending was strong in December – stronger than expected. Inflation increased in December, but the increased pace was expected. Other data showed that employment costs rose 0.9% over the previous quarter in the fourth quarter of 2024, also matching expectations. That put wage inflation at 3.8% year-on-year, down slightly from 3.9% in the third quarter of the year. Inflation pressures are increasing modestly. The question before the Fed is whether that is an aberration in an otherwise down trending pattern or is it indicative of a more structural problem. There are valid arguments in both directions, although my bias is the latter.
Tariff fears, or merely end-of-the-month book squaring. The overnight selloff in the grain and oilseeds had some of both, but the tariff fears were a significant part of the weakness to close out the month of January. Public policy is a lot like making sausage. It’s never as clean and nice looking as we would want it to be. Trade policy becomes even messier, as it blends together negotiating what is in the best interest of each nation involved with the strong personalities of the leaders that helped get them into their positions of leadership. There’s no arguing that President Trump likes to use his office as a bully pulpit to get things done. Sometimes that works well, and sometimes it creates chaos. But he also likes to use that chaos to reach his objectives. The chaos is part of his strategy.
Justin Trudeau has been Prime Minister of Canada since 2015. Its economy is struggling, and his approval numbers are low. That puts him at a disadvantage in negotiating with Trump. Trump treated him as “governor of the 51st state” to leverage that weakness. Claudia Sheinbaum Pardo became the first woman to serve as president of Mexico in October of 2024. The cartels hold significant power in Mexico. Her role in that will be debated, but regardless, she cannot look weak in front of her people when confronting Trump. Yet, she like Trudeau knows that her country cannot afford a trade war with the US. As such, we need to separate out what happens behind the scenes versus the sound bites that are provided to the media. Sheinbaum stated yesterday that she didn’t think that Trump will follow through with the tariffs, after he backed down from his threat to Colombia last weekend. So, does that mean that she doubts his seriousness, or that she plans to quietly meet Trump’s demands like Colombia’s president did? Unfortunately, her public statement of doubt may lead Trump to at least temporarily enforce the tariffs regardless of what’s happening behind the scenes. Reuters released a list of products that Mexico is considering applying varying levels of retaliatory tariffs to if Trump implements his tariffs. That list included pork products, cheese, apples, grapes, potatoes, cranberries, Bourbon whisky, manufactured steel, and aluminum, but it did not include auto parts, corn, soybeans, wheat, etc. that would hurt its economy deeply. Canada will likely take a similar approach, but it is keeping its list secret for now. Trump as well said he is considering leaving some products off his tariff hit list that would hurt the U.S. economy, such as Canadian crude oil. The bottom line is that the commodity markets will face headline risk through the day today, and likely through the weekend when the markets are closed. As such, grain and oilseed traders leaned to the short side overnight as they hedged their risk exposure.
