March 12 – Inflation for February came in cooler than expected, providing a dose of welcomed news for a market that is still reeling from a flood of tariff headlines as President Trump’s tariffs on steel and aluminum take effect today. Those tariffs brought swift retaliatory actions from Canada and Europe, which will impact other products. Yet, stocks are rebounding today following their recent sharp collapse, with the VIX easing back to trade near 26 after nearly touching 30 yesterday. The dollar index firmed to trade near 103.7. Yields on 10-year Treasuries are trading near 4.32%, while yields on 2-year Treasuries are trading near 3.99%. Crude oil prices are up by more than 1% after finding support yesterday near $65 per barrel, while the grain and oilseed sector was mostly in the red on tariff anxiety.
The headline consumer price index rose 0.2% month-on-month in February, down from expectations of 0.3%, and down from 0.5% growth in January. The CPI rose 2.8% year-on-year in February, down from expectations of 2.9%. and down from 3.0% in January. The core CPI that excludes food and energy also rose 0.2% on the month in February, down from analyst expectations of 0.3%, and down from 0.4% the previous month. The core CPI rose 3.1% year-on-year in February, down from expectations of 3.1%, and down from 3.3% in January. The above numbers were certainly welcomed news for those worrying about inflation returning this year. We’re still well above the 2% mandate – as we have been for the past several years – but we’re back to moving in the right direction.
Breaking down the details, we got to the above better numbers via a mixture of good and bad numbers. First the bad numbers. Food away from home rose 0.4% on the month in February, doubling the previous month’s pace. Fuel oil rose 0.8% on the month, but that was better than the 6.2% monthly gains seen in January. Energy services rose 1.4% on the month, while electricity gained 1.0% and piped natural gas went up 2.5% largely due to the cold weather experienced during the month. Used cars and trucks also gained 0.9% of value during the month, while apparel rose 0.6%. Those increases were partially offset by some significant declines. Energy commodities fell 0.9% on the month, after rising 1.9% in January. Gasoline prices were down 1.0% on the month, following 1.8% gains in January. New vehicle prices fell 0.1%, with cold weather keeping people off the show lots, while transportation services dropped 0.8%. Overall, these were good numbers, with Treasury yields initially breaking lower, before rallying once again.
Steel and aluminum tariffs of 25% were enacted today, with Canada our number one supplier of both. That didn’t settle well with Canada, which is still seeking to form a functioning government in the days and weeks ahead. Ontario took it upon itself to retaliate yesterday by stating that it would implement a 25% tariff on all electricity that it exports to the United States. President Trump responded that he would then double the tariff to 50%, at which time Ontario backed down. President Trump then took the opportunity to insist that Canada reduce the 250% to 390% tariffs that Canada currently places on U.S. dairy products, before reiterating his claim that Canada would be better off if it became our 51st state. Those latter threats are reinvigorating a sense of nationalism within Canada. I can see a line of logic with much of what President Trump does – whether I agree with it or not – but the 51st state rhetoric still doesn’t fall into place for me. Trump is very strategic with most of the things that he does and says, with the strategy often unclear to most until some time later. But his strategy with that suggestion still baffles me.
The grain and oilseed markets are bracing for retaliation from Canada, Europe, China and others. I’ve stated many times over recent years that the United States is losing China as a customer. That trend has been in place for much of the past 15 years, and the current tensions do little to change that trajectory. It makes little sense that a country wanting to top you economically would want to send large volumes of trade revenue to you, aside from the geopolitical tensions that are also a factor. However, Mexico is the customer that we cannot afford to lose. We have a definite freight advantage with rail transportation that reaches all significant areas of both Mexico and the United States – tying those regions together with efficient freight. That does not mean that we should take Mexico for granted, but it does provide incentive for both sides to work through the differences to reach a common solution. And I still believe that will happen. President Sheinbaum of Mexico seems to be doing a good job of working toward a solution with President Trump. However, Canada appears to be moving in the opposite direction. It does not want to reduce tariffs on U.S. dairy products, but it instead is threatening to limit crude oil exports to the United States, while also limiting imports of U.S. ethanol – steps that would hurt Canadians themselves, while also negatively impacting the United States. The White House hopes to have the tariff situation with Canada and Mexico cleared up by April 2nd so that it can focus on the reciprocal tariffs, but that’s looking less likely with Canada currently.
