Perspective: Morning Commentary for October 12

By: Arlan Suderman, Chief Commodities Economist

Wed, 12 Oct 2022, 13:41

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

October 12 – Stock futures firmed overnight as traders anticipated this morning’s inflation data. Those numbers tripped selling in the stocks, although the market didn’t fall apart. The VIX spent most of the night trading between 33 and 34, reflecting heightened anxiety levels on Wall Street. It quickly moved higher to top 34 following the release of this morning’s inflation data. The dollar index is trading near 113.3 this morning after the data’s release as the market anticipates that the Federal Reserve will sustain its hawkish ways. Yields on 10-year Treasuries are trading near 3.95%, while yields on 2-year Treasuries are trading near 4.30%. Crude oil prices are trying to consolidate near $90 per barrel, although they took a hit when the inflation data was released. The grain and oilseed sector posted modest losses overnight, and took an additional hit on the inflation data, but they are primarily focused on today’s USDA WASDE crop report data to be released at 11 a.m. Chicago time.

The producer price index rose 0.4% month-on-month in September, which was twice what was expected by analysts. Part of the reason for the larger adjustment was that the August number was revised to a reduction of 0.2%, after initially being reported as a 0.1% decline. The PPI rose 8.5% year-on-year in September, beating analyst expectations of 8.4%, although down from 8.7% year-on-year. This number peaked above 11% in March, so we’re off the high, but these numbers are still way too high nine months later. Keep in mind that the Federal Reserve was still in an expansionary monetary policy in March, making the switch about a year too late. That made the battle much more difficult, which is what we’re seeing play out.

The core PPI rate that excludes the more volatile food and energy sectors rose 0.3% month-on-month in September, matching expectations and matching the previous month that was revised up from 0.2%. The core PPI rose 7.2% year-on-year in September, which is down from 8.1% the previous month. The PPI minus food, energy and trade services rose 0.4% month-on-month in September, beating analyst expectations of 0.3% and twice the previous month’s pace, while being up 5.6% year-on-year, unchanged on the month. Wall Street’s reaction to these numbers was negative, but also somewhat muted. The month-on-month numbers are the hottest since June, with much of the upward pressure coming from what I call systemic inflation that’s not necessarily related to commodity prices. The year-on-year numbers are coming down, but that’s partly because year ago numbers were already rising, making it more difficult to sustain strong year-on-year numbers. But the bottom line is that systemic inflation still remains a significant problem. That’s the way I expect the Federal Reserve will view these numbers, which will likely keep it in a strong monetary tightening policy, which Wall Street will see as a threat. But much of that has been priced in already. The markets are future anticipating.

The Federal Reserve will release the minutes of its September meeting this afternoon, providing greater insight into the discussions taking place inside the meeting room as monetary policy was discussed. However, Fed members have been very active on the speaking circuit in recent weeks, and they appear to be mostly in agreement that tackling inflation means staying the course with the current policy toward monetary tightening and interest rate hikes. I doubt that the minutes will show anything too revealing that we don’t already know. Today’s numbers provide little fodder for pulling back on that policy, although we’ll get the consumer price index numbers tomorrow, where I suppose there could possibly be a surprise. Otherwise, the market has already priced in expectations that we will see another 75-basis-point rate hike early next month, followed by a 50-basis point rise in December.

USDA will release its monthly WASDE crop report at 11 a.m. Chicago time today. This is a significant report. The direction of changes in its corn and soybean yield estimates will set the tone for the weeks ahead. Either the market has already factored in this year’s crop problems, or it has more to factor in. But the export numbers will be big in today’s report as well. Low water levels on the Mississippi that pushed barge freight rates sharply higher, combined with a dollar at 20-year highs, has made it difficult to compete on the global market. Add soft Chinese demand to that. We could see USDA make significant cuts to its soybean export target, and possibly its corn export target as well. Some of this has already been priced into the market. The trade knows what’s happening. Headlines out of Ukraine / Russia will continue to influence the market as well. Those risks have not gone away. That will continue to be a factor until stocks build sufficiently to where it doesn’t matter again. Wheat will continue to be the leader at those times when headline risk is a factor, followed by corn.

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