July 11 – Stock futures pulled back from yesterday’s record highs overnight, ahead of this morning’s inflation data, but they rallied following the data release as Treasury yields plummeted. The VIX firmed to trade near 13, while the dollar index dropped to trade near a nearly five-week low near 104.2. Yields on 10-year Treasuries are trading near a fresh four-month low near 4.18%, while yields on 2-year Treasuries are trading at four-month lows near 4.49%. The broader commodity sector found support overnight, and the weaker dollar helps. Crude oil prices were modestly higher, while the grain and oilseed markets rallied as well, led by double-digit gains in wheat.
The headline consumer price index fell 0.1% month-on-month in June, down from analyst expectations of 0.1% growth, and down from a flat 0.0% reading the previous month. The headline CPI rose 3.0% year-on-year in June, down from analyst expectations of 3.1%, and down from 3.3% the previous month. The core CPI that excludes the more volatile food and energy components rose just 0.1% month-on-month in June, which was down from analyst expectations that it would remain unchanged at 0.2% growth. Core CPI gained 3.3% year-on-year in June, down from analyst expectations that it would rise by 3.5% during the month, which would have been an increase from 3.4% the previous month.
Consumer level inflation came in much better than expected, largely due to a 3.8% decline month-on-month in gasoline prices, combined with a 2.4% decline in fuel oil prices. Used car prices fell by 1.5% during the month, while new car prices fell by 0.2% and transportation service fell by 0.5% for the second month in a row. The latter had been an area of persistent inflation pressure earlier in the year. Those losses helped offset a 2.4% gain in natural gas prices, along with a 0.4% gain in food consumed away from home. Shelter costs continued to push higher, but at just a 0.2% rate on the month, while the same was true for medical care services as well. In summary, this was the type of report that starts raising deflation concerns, increasing the likelihood of a rate cut by the Federal Reserve. Fed fund futures trading still reflects less than 10% odds of a rate cut in the Fed’s meeting at the end of this month, but the odds of a cut at the September meeting jumped to more than 89% this morning.
First-time claims for unemployment benefits fell to 222K in the week ending July 6, down from 239K the previous week, and below analyst expectations of 239K. This dropped the four-week moving average to 233.5K claims, down from 238.75K the previous week. Continuing claims for the week ending June 29 dropped by 4K to 1.852 million, while the four-week moving average rose by 9,750 to 1.840 million. These numbers had been trending higher through June. The question now is, are they plateauing, or did the Independence Day holiday reduce the number of claims? Federal Reserve Chair Jerome Powell told members of the House Financial Services Committee on Wednesday that the jobs market is now in balance, and essentially no longer contributing to inflation problems. I think that statement was a bit premature, based on my look at the data, but the numbers are certainly trending in that direction, contributing to Wall Street’s hopes and expectations of a September rate cut.
Problems continue for China’s economy. A total of 296 listed Chinese companies just released their mid-year earnings reports, with two-thirds of them reporting either declining profits or larger losses during the period. Just 70 (24%) of the companies posted better earnings, while 23 reported a positive turnaround in earnings. The index measuring the health of China’s small and medium sized enterprises fell another 0.3 points to 89 in the 2nd quarter. A number below 100 indicates contraction. The service sector saw growth in the second quarter, while contraction was seen in manufacturing, transportation, construction, retail, property, and restaurant catering. Outside economic pressure may continue to grow in the months ahead after NATO yesterday officially accused China of contributing to Russia’s illegal war on Ukraine. It was the first time that we’ve seen such a direct warning directed toward China from NATO, which may also serve as a warning of possibly more economic sanctions being directed at China. Also of note, Germany cut Huawei from its 5G wireless network yesterday.
Hot and dry conditions dominated much of the North China Plain in June, raising concerns about its vast corn and soybean production capability. But the rains returned in the first 10 days of this month, providing very timely relief for the crops. In fact, it was by far the wettest 10-day period for early July in the region of the past 40+ years. Commodity Weather Group identified three other years that saw a similar pattern. All three ended up with above trend corn yields, while two of the years saw above-trend soybean yields, and one a below trend yield. However, the Black Sea corn belt continues to suffer from hot dry conditions, with readings expected to peak above 100°F early next week. That may end up reducing corn exports from the region four to six months from now.
