May 31 – Stock futures rallied and the dollar followed Treasury yields lower after this morning’s inflation data matched expectations with no significant surprises. It was like a big sigh of relief could be heard across Wall Street that we didn’t see another report of higher-than-expected inflation. That doesn’t necessarily mean that we will get down to the 2% mandate, but Wall Street is relieved that at least the data wasn’t worse than expected, as we’ve seen far too many times this year. The VIX is trading just below 14 this morning, while the dollar index is trading near 104.4. Yields on 10-year Treasuries fell to trade near 4.51%, while yields on 2-year Treasuries dropped to trade near 4.91%. Crude oil prices firmed modestly on the data release, while the grain and oilseed markets generally saw a good rebound from Thursday’s losses in overnight trade.
Personal income rose 0.3% month-on-month in April, matching analyst expectations, while down from 0.5% growth in March. Personal consumption expenditure rose 0.2% month-on-month in April, down from analyst expectations of 0.3% growth, and down from 0.7% the previous month. The headline PCE price index for April rose 0.3% month-on-month as expected, which also matched the previous month’s pace. The PCE price index rose 2.7% year-on-year in April, again matching expectations and matching the previous month’s pace. The core PCE price index that excludes the more volatile food and energy components rose 0.2% month-on-month in April, matching expectations, but down from 0.3% the previous month. The core PCE price index rose 2.8% year-on-year in April, matching analyst expectations, and matching the previous month’s pace. Holding the month-on-month inflation numbers at the pace seen in April, combined with what we’ve already seen this year, will not get us down to the 2% mandate this year. Furthermore, a rate cut without a preceding sharp decline in the economy will merely stimulate more inflationary pressures. Today’s data keeps us on the path that we’ve been on, reflecting a stagnant economy with sticky inflation pressures that won’t go away. But Wall Street’s come to accept that, as has the Fed as well.
China’s official Purchasing Managers Index data came in notably weaker than expected today. The manufacturing PMI dropped to 49.5 for May, down from 50.4 the previous month and below expectations of 50.5. An index below 50 indicates month-on-month contraction, while a number above 50 indicates month-on-month expansion. The decline was largely due to contraction in new orders this month, with the export order subindex falling to 47.2 from 50.6 the previous month. The non-manufacturing PMI measures sentiment in the service and construction sectors. It came in at 51.1 for May, down from 51.2 in April and below market expectations of 51.5. New orders for construction fell to 44.1 this month, down from 45.3 in April, indicating that government stimulus projects have not been enough to offset the drag in slow housing projects. The service sector business activity subindex dropped to 47.4, down from 50.3 the previous month, despite a boost from holiday sales during the five-day May Day holiday at the beginning of the month. These disappointing numbers also came despite the launch of more aggressive stimulus packages by Chinese authorities in May.
Managed money largely unwound their massive short positions in the major commodities – in some cases going long – as reinflation pressures increased this spring. Crude oil did it first, spurred on by rising geopolitical risks. Virtually all of the major commodities saw this swing in managed money at a time when supplies remained ample. Yes, there were stories of fundamental support, but the market response was larger than we would have seen over the past two years of “commodity deflation” talk. That reality first hit in crude oil when it saw more than a 50% retracement of the rally as traders realized that prices were too high relative to the fundamentals, although they were still higher than what the market previously would have traded versus those same fundamentals. We’ve seen a similar retracement now in corn, with soybeans approaching a 50% retracement as well. Meanwhile, wheat prices are still holding much of their spring rally, as traders remain focused on more of an intriguing story there.
Wheat prices experienced a couple of days of selling mid-week as rains crept back into the forecast for dry areas of the Black Sea Region. We’ve remained skeptical of those rains, since drought tends to begat drought, and as Commodity Weather Group also remained skeptical. Prices rebounded overnight as the market seemed to come to understand that the risks remain in place. Showers are indeed expected to benefit the northwestern half of Ukraine’s wheat belt, but the southeastern half of Ukraine’s belt and the southern half of Russia’s belt are expected to largely remain dry over the coming 10 days, with daytime temperatures rising into the mid-90s during the period to add to the crop’s stress. The risk is that the forecast could change over the weekend, but for now, today’s forecast suggests that we will see additional reductions in production estimates for the Black Sea Region. It starts to dynamically impact global cash trade when/if Russia takes steps to restrict exports to contain food inflation at home.
