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By: Arlan Suderman, Chief Commodities Economist
Today's Perspective Video: Two Wars are Shaping the Commodity Markets
July 14 – Inflation is the focus again over the next couple of days, with critical data for June being released and crude oil prices rising to four-week highs once again. That led to mixed action overnight among the equities, even as fighting escalates in the Middle East. The VIX is trading near 17 this morning, while the dollar index trades near 100.7. Yields on 10-year Treasuries are trading near 4.58%, while yields on 2-year Treasuries are near 4.20%, after setting a fresh 17-month high overnight. WTI crude oil is trading at a four-week high near $80, while Brent trades near $87 per barrel. The grain and oilseed sector turned mostly weaker in the early morning hours.
The headline consumer price index fell 0.4% (deflation) on the month in June, down from +0.5% the previous month, and lower than the -0.1% expected by analysts. The headline CPI was up 3.5% year-on-year in June, down from 4.2% in May and down from analyst expectations of 3.8%. So, the month-on-month number showed greater deflation than expected, while the year-on-year number showed cooler inflation than expected. The core CPI that excludes the more volatile food and energy sectors was flat on the month in June, down from 0.2% the previous month and down from analyst expectations of 0.2%. The core CPI rose 2.6% on the year in June, down from 2.9% the previous month, and down from analyst expectations that it would remain at 2.9%. So, both the headline numbers and core inflation numbers were a pleasant surprise on both the monthly and yearly data.
The headline numbers reflected a 9.5% drop in gas and 9.2% drop in fuel oil prices on the month, while electricity also dropped by 1.0% during the month. Unfortunately, those declines in gas and fuel oil are not continuing in July, partially due to the end of the ceasefire in the Persian Gulf, but even more due to the rise of fighting in the Black Sea war between Russia and Ukraine. That suggests that we may not see this decline in inflation pressures continue when the July data is seen next month. However, it was encouraging to see inflation in the service sector minus energy flat, with shelter up just 0.1% on the month, transportation services down 0.3%, medical services down 0.1%, and apparel down 0.6%. New vehicle prices were flat on the month and used vehicles were down 0.2%. Those are very positive numbers for inflation, although they also raise concerns regarding whether they reflect a slowdown in consumer buying? We’ll get retail sales data for June on Thursday.
President Trump reinstated the blockade on Iran’s coastline today. No ships will be allowed to do commerce with Iran, although ships delivering food, medical supplies, etc. will be allowed through after inspection. All other ships will be allowed to pass, although Iran has continued to show the capability of striking ships that choose to use the U.S. prescribed route along the coast of Oman. The United States declares that the Strait is open for non-Iran-connected ships, while Iran states that it is closed. Ships are still moving through the Strait of Hormuz, but the reports on totals varies widely. That’s largely because those ships that are moving through the Strait are doing so with their transponders turned off. Some of the reporting services are “finding” those ships on the other side of the Strait and counting them, while others are not. One service I found indicated that there were 9 vessels that moved into the Persian Gulf through the Strait yesterday, while 10 exited, and that number was roughly in the middle of estimates that I saw, with 34 ships passing on the high end and near zero on the low end.
The United States will also be the “GUARDIAN OF THE HORMUZ STRAIT,” according to President Trump’s post, putting us directly at odds with Iran’s similar declaration. As guardian, President Trump indicated that the United States will be “reimbursed” at a rate of 20% on all cargo shipped to cover the costs of providing safety and security in this very volatile part of the world. That created more questions than answers, but it also illustrates the intensity of the power struggle between Iran and the United States to be the power in control in the region. But a key question that remains unanswered is whether this 20% reimbursement is a charge against shipping companies, a deduction from aid previously promised toward rebuilding Iran, or something different? The answer to that question has massive implications for the international trade community, and for the overall global economy.
The Kerch Strait remains closed today as Ukrainian strikes on Russian-connected ships in the Sea of Azov continue. Russia has been quick to assure the world that it will meet its wheat delivery requirements by directing shipments through other ports on the Black Sea versus those in the Sea of Azov. It’s yet to be seen whether Russia can fully make that happen. The wheat market is currently assuming that it will do so. Corn and soybean prices fell today as the previously hot European weather model dramatically cools to fall more in line with other more moderate models, removing much of the heat threat for the Midwest beyond the next few days. A showery pattern is expected to return for much of the Midwest starting next week as well, with a possible return of heat at month’s end.
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Weather often dominates wheat headlines, but rising production costs are becoming just as important in shaping future supply. Across several major exporters, weaker farm economics are reducing planted area and increasing the risk of tighter global availability.
July 14 – Inflation is the focus again over the next couple of days, with critical data for June being released and crude oil prices rising to four-week highs once again. That led to mixed action overnight among the equities, even as fighting escalates in the Middle East. The VIX is trading near 17 this morning, while the dollar index trades near 100.7. Yields on 10-year Treasuries are trading near 4.58%, while yields on 2-year Treasuries are near 4.20%, after setting a fresh 17-month high overnight. WTI crude oil is trading at a four-week high near $80, while Brent trades near $87 per barrel. The grain and oilseed sector turned mostly weaker in the early morning hours.
July 13 – We’re back at war in the Persian Gulf, adding to problems in the Black Sea war; threatening global energy supplies this morning, with risks for food-based commodities as well. Key inflation data will be released over the next two mornings. The equities are mixed to firmer as a result, while the VIX remains relatively low near 16. The dollar index continues to chop around near 101.0 this morning. Yields on 10-year Treasuries are trading near 4.58%, while yields on 2-year Treasuries are trading near 4.23, reflecting a fresh 16-month high. WTI crude oil prices are trading near $74 this morning, while Brent trades near $78. Corn and soybean prices followed crude oil higher overnight, while wheat prices turned lower despite the fact that the Kerch Strait is still closed this morning.
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