November 13 – Stock futures firmed into positive territory as this morning’s inflation data was released, as Treasury yields declined, dragging the dollar lower as well. The VIX dropped below 15 on the data release, falling to its lowest level since late July, while the dollar index briefly pulled back from its six-month highs. Yields on 10-year Treasury yields are trading near 4.39% at this hour, while yields on 2-year Treasuries are trading near 4.26%. Crude oil prices are more than 1% lower, while the grain and oilseed markets were mostly lower ahead of the pause this morning as well.
The headline consumer price index rose 0.2% month-on-month in October, matching both the previous month’s pace, and matching the average trade guess. The headline CPI rose 2.6% year-on-year in October, matching the average trade guess, but that was an increase from 2.4% in September. The core CPI rose 0.3% month-on-month in October, again matching both the previous month’s pace and matching the average trade guess. The core CPI rose 3.3% year-on-year in October, matching both the previous month and the average trade guess as well. So, the bottom line is that headline inflation went up in October on a year-on-year basis, and core inflation remained well above the Federal Reserve’s 2% mandate, but it all matched what the trade expected, so stocks rallied, and Treasury yields fell on expectations that we’ll see more rate cuts from the Fed in future meetings.
A deeper dive into the data shows that declining energy prices continue to be a drag on inflation, with gasoline down 0.9% month-on-month and down 12.2% year-on-year. Fuel oil fell 4.6% month-on-month in October, while being down 20.8% year-on-year. We also saw a 1.5% drop in apparel costs on the month, and a 0.2% decline in medical care commodities. Food inflation finally tamed, with food at home up 0.1% on the month, and food away from home up 0.2%. However, shelter costs heated up again, up 0.4% m the month and 4.9% year-on-year. Transportation services rose 0.4% on the month and 8.2% year-on-year, and medical care services were up 0.4% on the month and 3.8% on the year. Used cars and trucks saw a 2.7% rise on the month as well, although they’re still down 3.4% year-on-year. But the bottom line is that services less energy was up 0.3% on the month in October, while being up 4.8% on the year. The Fed is focused on the labor market, which has its problems. But this is by no means a recessionary labor market. I recognize that the Fed wants to be ahead of the curve, and I understand that. But it also faces a risk of pouring fuel on lingering inflation embers if it is too aggressive with rate cuts in a world where the service sector is currently experiencing strong growth. Gross domestic product is still solidly above 2%, the unemployment rate is barely above 4%, layoffs are ticking higher, but remain at historically low levels, wages are trending higher again, and same-store retail sales are solid. Weekly bankruptcy filings are at historically low levels and credit card debt as a percent of disposable income is still below pre-pandemic levels.
USDA’s daily flash sales announcement indicates that “unknown destinations” purchased 11.4 million bushels of U.S. corn, while Mexico bought another 15.8 million bushels in the past 24 hours. But we haven’t seen a flash sale of soybeans since Friday. We estimate that China has booked roughly two-thirds of its expected December shipments of soybeans thus far, and less than 10% of its January shipments. Keep in mind that expectations were already low for December and January – essentially the lowest of the year, and roughly half the shipment levels that China anticipates from months when Brazil soybeans are flowing. Some speculated that China was being slow to book ahead of the elections, and in fact some of its buyers stated that they didn’t want to be seen as influencing the elections. But we’ve not seen an increase in purchases in the week following the election either, as trade war fears rise within China.
There are three possible scenarios being discussed currently within China that could develop from the upcoming Trump 2.0 presidency. The first scenario would see President Trump and President Xi Jinping reach a trade agreement that eases tensions in which China agrees to buy more corn and soybeans from the United States in exchange for other more favorable policy stances from the United States. The second scenario would be a continuation of the current tensions with China continuing to slowly move away from U.S. commodities as it leans increasingly more on garnering supplies from Brazil, Argentina, Ukraine, and others. The third scenario would be an escalation of tensions resulting in an even faster pace of deleveraging from U.S. commodities. Regardless, cheaper new crop soybean supplies from Brazil will be available by the time that Trump is sworn into office on January 20th, giving six months or so to see which of the above scenarios becomes reality before we get to see how it will impact Chinese buying of the 2025 crops. In the meantime, Mexico will likely continue to be our most dependable trade partner, as it continues to purchase large quantities of corn, and sizeable quantities of soybeans and soymeal.
