Perspective: Morning Commentary for October 28

By: Arlan Suderman, Chief Commodities Economist

Fri, 28 Oct 2022, 13:20

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

October 28 – Both the commodities and the equities came under modest pressure overnight ahead of this morning’s inflation and personal income data, although the VIX remained near its one-month low at roughly 27. The dollar index traded near 110.9 this morning. Yields on 10-year Treasuries traded near 4.02%, while yields on 2-year Treasuries traded near 4.38%. Crude oil prices were roughly 1% lower, while the grain and oilseed markets were modestly lower as well.

Personal income rose 0.4% month-on-month in September, matching the previous month that was revised upward from 0.3%. Analysts had expected the September number to be up 0.3%. So, September income was up a bit more than expected. Personal consumption expenditures were also hotter than expected, gaining 0.6% month-on-month during September. That matches the previous month’s expenditure growth, which was revised up from 0.4% growth, but it’s notably higher than the 0.4% growth expected by analysts. So, consumers spent more than expected in September. This led to more inflation during the month, albeit close to expectations.

The PCE price index rose 0.3% month-on-month in September, matching analyst expectations and matching the previous month’s inflation growth. The PCE price index rose 6.2% year-on-year in September, matching the previous month, and slightly below analyst expectations that it would rise to 6.3%. The core PCE price index that excludes the more volatile food and energy sectors, rose 0.5% month-on-month in September, matching analyst expectations, and matching the previous month’s pace. The core PCE price index was up 5.1% year-on-year in September, which was slightly below analyst expectations of 5.2%, but up from 4.9% the previous month. In other words, inflation remains well entrenched in the economy, with few signs of going down. In fact, the Cleveland Federal Reserve’s model, which has done a fairly good job to this point, predicts that the October PCE price index that will be reported next month will rise nearly 0.6% month on month and nearly 6.3% year-on-year, with the core PCE index expected to be up 0.4% month-on-month and 5.2% year-on-year when it gets reported. In other words, the Cleveland Fed is forecasting even stronger year-on-year inflation for the current month that will be reported late next month. These are the numbers that the Federal Reserve follows, giving me little evidence to date that the Fed intends to ease up on its monetary tightening as it prepares to meet again next week.

The employment cost index rose 1.2% quarter over quarter in the third quarter of this year, matching analyst expectations, although down slightly from the 1.3% posted for the second quarter. The employment cost index was up 5.0% year-on-year in the third quarter, matching analyst expectations, but down slightly from 5.1% the previous quarter. As such, this shows that wage inflation slowed slightly in the third quarter, but it show any notable change. The Federal Reserve needs to address wage inflation, or the overall inflation rate will struggle to go below that of wage inflation. That means pushing the unemployment rate upward to 6% or higher, which means inflicting some pain on the economy – something nobody really wants to talk about.

The next step for China following the meeting of its Communist Party Congress every five years is to make changes to its constitution to reflect decisions made during the meeting, as well as to codify intended actions following the meeting of Congress. Those changes in the constitution are now being released. One change of great significance was in the wording about pulling Taiwan into China. The revised text affirmed the need to elevate the people’s armed forces to world-class standards and to pledge to oppose and deter separatists seeking “Taiwan independence resolutely.” The new wording also obligates party members to support President Xi Jinping’s core position in the party and to reaffirm the Party’s leading role in every aspect of society as the highest force in leadership. The altered language regarding Taiwan with specific dos and don’ts is seen as a clear step-up in aggression from previous amendments to the constitution, confirming Beijing’s hardline policy on Taiwan that enables the Party to defend any actions it takes to “reunify” Taiwan to the Mainland as a constitutional right.

We don’t know when China will make its move to take control of Taiwan, but the move appears much more likely now, and likely sooner than later. It might be next week, or it might be a couple of years from now, but it appears more likely to happen, and it won’t be seen as good for U.S. sales of commodities to China. This is a risk factor that must be respected. Part of the timing question may hinge on Brazil’s weather for the current growing season. A good crop in Brazil would decrease the need for China to depend on U.S. commodities. But the larger factor in timing will likely hinge on actions taken by the West to defend Taiwan. China believes that Russia’s error was to give the West time to militarize Ukraine. It doesn’t intend to give the West the opportunity to do that. There’s a bill pending in Congress currently to provide military aid to Taiwan that China is monitoring closely.

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