March 28 – Stocks came under pressure early this morning when the personal income and outlays data was released, suggesting slower consumer spending than expected and hotter core inflation. This all comes amid the nervousness already present on Wall Street ahead of next week’s big scheduled tariff announcements. The VIX pushed back above 19 this morning, while the dollar index trading near 104.3. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 3.97%. Yields fell on this morning’s data release. Crude oil prices erased overnight weakness to trade mixed this morning, while the grain and oilseed markets were mostly in the red, with the exception of the edible oils.
Personal income surged by 0.8% month-on-month in February, doubling analyst expectations. However, the growth in January was revised to 0.7% growth, down from the 0.9% growth originally reported. Personal consumption expenditures rose by 0.4% on the month in February, down from analyst expectations of 0.5% growth, but an improvement from the downwardly revised -0.3% seen in January. The headline PCE price index rose 0.3% on the month in February as expected, which also matched what was seen in January. The headline PCE price index rose 2.5% year-on-year in February, matching the previous month and matching analyst expectations. The core PCE price index that excludes food and energy prices is what the Federal Reserve pays the most attention to when making policy decisions regarding inflation. It rose 0.4% on the month, exceeding analyst expectations of 0.3%, and up from 0.3% growth in January. The core PCE price index rose 2.8% year-on-year in February, up from analyst expectations of 2.7%, and up from an upwardly revised 2.7% the previous month. One might have expected Treasury yields to rally upon the data’s release on the expectation of the Fed holding rates higher for longer to contain this rise in core inflation, but the first reaction was for yields to fall, as the market responded to the disappointing rebound in consumer spending, amid fears that it will fall further considering the recent sharp decline in consumer confidence readings.
Stocks fell in China today on fears over what President Trump’s tariff announcements next week might mean for trade between the two countries. The Shanghai Composite Index fell by 0.67%, while the Shenzhen Composite Index cropped by 0.57%. Meanwhile, gold continues to be a safe-haven asset for investors and central banks alike, including in China, with prices hitting fresh record highs this morning. China’s property market continues to struggle, despite efforts of the government to stimulate movement, with foreign investors net sellers of property in China for the fourth straight year in 2024. It’s being reported that BlackRock is attempting to sell its last major real estate asset in Shanghai – a 27-story office tower – at a price that is more than one-third lower than what it paid for it in 2017.
Commodity traders noted that Beijing failed to renew export registrations for U.S. beef exporters that expired on March 16, even though registrations were renewed for U.S. pork and poultry facilities. This makes it even more difficult for U.S. exporters to reach the Chinese market after Beijing imposed an additional 10% retaliatory tariff on beef imports from the United States. USDA data released on Thursday indicated that beef export sales to China for the week ending March 20 totaled just 54 metric tons, compared to the average of more than 2,000 metric tons per week from February into early March. U.S. beef previously accounted for roughly one-eighth of China’s beef imports in 2024. That beef must now find another home.
Fear is the driver this morning in many of the markets. We’re not seeing outright panic, as the markets have already priced in much of the fear in recent weeks. But there’s definitely a sense of apprehension that can be felt across many markets ahead of next week’s expected reciprocal tariff announcements. Then the next question will be, how will our trading partners respond to the new reciprocal tariffs? Will they respond by raising their tariffs even further, resulting in Trump doing the same to keep them reciprocal? Or will they quickly come to the negotiating table to lower those tariffs, as is hoped by the Trump Administration. One response leads to a trade war where the country with the trade surplus has the most to lose, with inflation increasing for both parties in the process. The other response leads to more efficient trade, lower inflation, and economic growth.
The same fear hangs over the commodity markets as well. Tariffs on Canadian crude oil could mean an extra 6 to 9 cents per gallon for fuel at the pump in the Midwest, while retaliatory tariffs by Mexico on Ag commodities could crush demand for vital commodities. However, doing so could also mean a significant rise in food inflation in Mexico, which it cannot afford. Between now and then we have USDA’s quarterly grain stocks and planting intentions reports. The uncertainty of it all has fear as the dominant factor in the markets heading into the weekend.
