Perspective: Morning Commentary for October 29

By: Arlan Suderman, Chief Commodities Economist

Fri, 29 Oct 2021, 13:20

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

October 29 – Stock futures came under pressure overnight ahead of this morning’s inflation data, led by the tech sector, following disappointing earnings reports from both Apple and Amazon. The VIX elevated to a two-week high above 18 early this morning on the increased concerns. The dollar index bounced following yesterday’s big losses, trading currently near 93.8, as yields on 10-year Treasuries trade near 1.61%. Crude oil prices are more than 1% lower in early trade on this Friday, while the Ags are mixed.

The PCE price index, followed closely by the Federal Reserve for monitoring inflation trends, rose 0.3% month-on-month in September, matching the previous month’s pace, while coming in slightly below the trade’s expectations of 0.4% growth. The PCE price index rose to a new 30-year high 4.4% year-on-year in September, up from 4.2% the previous month, but a bit below expectations that it would come in at 4.5%. The core PCE price index that excludes the more volatile food and energy sectors – right or wrong, this is the one the Fed focuses on – rose 0.2% month-on-month in September. That was down from 0.3% growth in August, but it matched analyst expectations. The core PCE price index rose 3.6% year-on-year in September, matching the previous month’s pace, but slightly below expectations of 3.7% growth. The bottom line is that inflation remained at a high level in September. Other data showed that personal income fell 1.0% month-on-month in September, versus expectations that it would fall 0.1% and versus the 0.2% gains seen the previous month. Personal consumption expenditures increased 0.6% month-on-month in September, down from 1.0% growth the previous month, but up from expectations of 0.5% growth.

Wage inflation increased in the third quarter of this year. The employment cost index increased 1.3% quarter-over-quarter in the third quarter, up from 0.7% the previous quarter and above market expectations of 0.9%. The employment cost index rose 3.7% year-on-year in the third quarter, up from 2.9% the previous quarter, and well above market expectations of a 1.8% increase. The employer cost of employees is rising faster than expected, with those costs expected to be passed along to the consumer, resulting in more inflation at the retail level.

The U.S. dollar index broke notably on Thursday when the euro rallied in response to statements made by the European Central Bank. Keep in mind that market expectations for inflation in Europe topped 2% for the first time in some years over the past week, raising expectations that the ECB would need to tighten its monetary policy sooner rather than later. The ECB’s policy guidelines establish a very tight target of 2% inflation – not wanting to be either above or below the target. The ECB kept its current monetary policy when it met on Thursday, but its comments failed to convince traders that policy makers remain committed to their current easy-money policy. Profit taking took back some of yesterday’s euro gains in today’s trade, allowing the dollar to rally as demand for the greenback increased once again in response to higher yields on Treasuries. However, this is something to watch in the months ahead as the ECB responds to its very narrow inflation target, versus the very loose guidelines of the Federal Reserve. The Bank of Canada also took a perceived hawkish turn Thursday.

This could have significant implications for money flow into or out of the commodity sector going forward. The primary question at hand is whether other major economies start raising interest rates at a faster pace than the United States, easing foreign demand for greenbacks to participate in the U.S. securities markets. That could allow the dollar to fall relative to other currencies, increasing demand for U.S. commodities. However, if the Fed tapers at a quicker pace, that could necessitate a faster rise in yields for U.S. securities, pushing rates higher at a faster pace, along with increasing demand for dollars – all of which impacts the commodity markets. Policy matters.

Energy prices pulled back from multi-year highs in recent days, but they remain at historically high levels. That is especially true of natural gas prices, which are the primary component for fertilizer production, creating concerns for the global 2022 corn crop. Gas suppliers are telling farmers in France – the EU’s top corn producer – to leave corn in the field to dry due to the tight supply. That may work out well for France, but the same is occurring in Ukraine, where the winters are much harsher. The Ukraine corn harvest is roughly a third complete currently, versus normally being half done at the end of October. The French harvest is also roughly one-third complete, versus the 75% pace seen a year ago, although some of that is due to recent rains. Nonetheless, high energy prices remain a long-term concern for the global corn balance sheet that must be monitored.

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