Perspective: Morning Commentary for November 10

By: Arlan Suderman, Chief Commodities Economist

Wed, 10 Nov 2021, 14:14

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

November 10 – Escalating inflation worries weighed on stocks overnight, with this morning’s consumer inflation data doing little to ease those concerns. The VIX traded to a new four-week high above 18 this morning, while the dollar index is trading near 94.3. Yields on 10-year Treasuries are trading near 1.48%. Crude oil prices are modestly higher after trading just below seven-year highs earlier in the session, while the Ags are mostly higher.

First-time claims for unemployment benefits fell to 267K in the week ending November 6, matching analyst expectations, but still a new post-pandemic low below last week’s 269K claims. Last week’s number was the lowest since the week ending March 14, 2020, when the total was 256K. Continuing claims increased by 59K to 2.160 million, which is the first increase that we’ve seen for a while. November is the month when we run into many of the vaccine mandates. Wall Street traders are watching to see the potential impacts of the mandates on the weekly claims for unemployment benefits.

Inflation at the consumer level is hot, and it is getting hotter. Inflation at the wholesale level is making its way to the consumer level in a way that we have not seen since the late 1970s. That doesn’t mean that we will necessarily see it reach the same level that we saw it four decades ago, but the pattern is disturbing. The consumer price index rose 0.9% month-on-month in October, more than doubling the 0.4% rate seen in September, and well-above the 0.5% growth expected by analysts. The CPI was up 6.2% in October, up from 5.4% in September and above analyst expectations of 5.8%. Core CPI that excludes the more volatile food and energy rose 0.6% month-on-month in October, tripling the 0.2% rate seen in September and above the 0.4% expected by analysts. Core CPI rose 4.6% year-on-year in October, up from 4.0% in September and above analyst expectations of 4.3%. Today’s data provides greater evidence that we are dealing with perpetual inflation, and not transitory inflation, which is what I’ve been saying for much of this year. I lived through the Paul Volker days four decades ago. I saw what he had to do to reign in inflation. I saw the impact on the economy and specifically on agriculture. I don’t want us to go down that path again. Yet, that is the path that we are still on. Hopefully, our fiscal & monetary leaders will get wise before we fully repeat it, or even surpass it in its devastating effects on people.

Inflation is a rising problem in China as well, with all indications that it will continue to be exported to Europe and to the United States. China’s producer price index was up 13.5% year-on-year in October, which is its highest level in 26 years. That compares to year-on-year rates of 9% in July, 9.5% in August and 10.7% in September. In other words, inflation continues to ramp up at the wholesale level, which is reflective of the goods exported to us. Most of this increase was energy related. China’s CPI rose 1.5% year-on-year in October, showing that the consumer is still being shielded from inflation at the producer level at this point in China. Pork prices were down 44% year-on-year, accounting for a 0.98% decline in the overall CPI. Vegetables were up 15.9% year-on-year.

China reported another 39 cases of Covid-19 yesterday, which is a two-week low. That suggests that its zero-tolerance policy is again working, albeit at some cost to its economy, as well as to the global economy. However, today’s report raises some red flags. Dalian reported 17 new cases that could disrupt logistics in this important port city. Furthermore, these cases do not appear to be related to the previous outbreak. The first person infected in the Dalian outbreak had not traveled in the past 14 days, but rather was someone who works with imported cold chain products. This would represent the third cold-chain-related outbreak in Dalian in the past 18 months. Furthermore, it represents another challenge to the never-ending cycle of outbreaks and lockdowns that are proving to be a hindrance to China’s economy, and to supply chains.

USDA’s corn and soybean production estimates came in below feared levels on Tuesday. The pattern in recent years has been for the corn crop to come down in its final number (not necessarily its January number). The supply side of the balance sheet is now pretty well known, putting the focus back on weekly demand data, South American weather, and the broader commodity inflation trends. That doesn’t mean that every asset goes higher, or that any one commodity is immune to seeing lower prices, but it does suggest that the sector as a whole will see increased money flow as a hedge against inflation in investor portfolios. Take note that commodity prices, including the Ags, rallied after this morning’s inflation data was released. High crop input prices will be the hot topic in this discussion.

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