October 31 – Overnight trade saw many of the energy and food commodities, along with Treasury yields, sitting just above areas of chart support searching for direction. Stock futures saw modest follow through buying from yesterday’s bounce, although a lot of headlines will have the opportunity to influence that direction during the remainder of the week. Current support for stocks comes from cautious optimism that the Federal Reserve will provide language about a possible policy pivot when it emerges from its meeting tomorrow afternoon, while gains are limited by lingering risks from the escalating war in the Middle East and the plethora of job-related data scheduled for release the next several days. The VIX is trading near 19 this morning, while the dollar index is trading near 106.3. Yields on 10-year Treasuries are trading near 4.85%, while yields on 2-year Treasuries are trading near 5.06%. Crude oil prices are modestly higher, while the grain and oilseed sector is mostly weaker this morning.
The employment cost index rose 1.1% quarter on quarter in the third quarter of this year, exceeding analyst expectations of 1.0% growth, which is also what we had seen in the second quarter. That means that the employment cost index – a measure of wage inflation – rose 4.3% year-on-year in the third quarter, down from 4.5% the previous quarter. The bottom line is that wage inflation remains too strong in the eyes of the Federal Reserve, which I expect it to highlight in its statements on Wednesday. We’ll certainly get more data on employment and on employment costs through Friday of this week, but my current expectation based on what Federal Reserve members have previously said is important to them is that they will highlight the stickiness of inflation in what they call the “super-core” sector of the economy, which is largely tied to wage inflation. It’s that language that I believe they will emphasize in order to keep both the markets and the consumer from thinking that they are close to a pivot. It’s those ideas that we are close to a pivot that keeps the consumer spending, contributing to the source of the wage inflation. I do expect however, that we will see the Fed slow the pace at which it is reducing its balance sheet as we get deeper into next year.
China’s official manufacturing PMI surprisingly contracted to 49.5, down from 50.2 in September, while the market expected it to continue to build on recent signs of expansion. Meanwhile, the non-manufacturing PMI was at 50.6 in October, down from 51.7 in September, and the lowest since March, missing market expectations of 51.8. Today’s PMI data cast doubts on China’s recovery despite some recent positive signs. The unexpected decline in the manufacturing PMI suggested the economic recovery remained vulnerable as China has been grappling with the crisis in the property sector and shrinking exports. The new order index dropped to 49.5, from 50.5 a month earlier, while the new orders for export fell steeper to 46.8 from 47.8 in September. A number below 50 signifies contraction, while a number above 50 indicates growth. The government recently took proactive fiscal measures and rolled out 1 trillion-yuan sovereign bonds to pump up infrastructure construction, so we will need to see how that plays out to overcome the economic headwinds ahead.
China booked 26 cargoes of soybeans for shipment last week, bringing the purchase pace back up to normal levels after several weeks of slower purchases. There had been rumors that up to 10 cargoes of Brazilian soybeans had been washed out by Chinese buyers during the week, but they were not replaced with U.S. soybeans, with low waters on the Panama Canal being a limiting factor for purchases of U.S. soybeans via the Gulf ports. China booked more than 12 million metric tons of soybeans for loading in October, with nearly half of those shipments coming from Brazil this year due to the continued availability of competitively priced supplies. That 12 mmt of soybean shipments will again exceed China’s crush needs, allowing it to continue to build supplies to fill its needs during times of slower shipments down the road. China has booked roughly 7.5 mmt of soybeans for shipment in November, with nearly half of that also coming from South America – largely from Brazil. Roughly half of the 2 mmt it has booked for December shipment thus far will also come from Brazil. That’s the major reason that marketing year sales to date for U.S. soybeans fall short of the seasonal pace needed to hit USDA’s target by 150 million bushels. Shipments have been strong over the past month, but the shipment pace of recent weeks is unsustainable if we don’t soon see a sharp increase in sales. That would likely necessitate a sharp turn for the worse in production prospects for Brazil’s ’24 crop. It’s been drier than normal in Center-West Brazil, creating some concerns for farmers there, along with the need to do some replanting. But forecasters are starting to gain confidence in a significant increase in rain opportunities this weekend, which could still put Brazil on track to produce another big crop if those rains verify.
