September 11 – 9-11; May the memory linger and may we never forget. This is a somber day in American history that directly impacted our identity, along with our economy, as it struck at the heart of Wall Street.
Stock futures posted modest gains overnight as traders brace for a big week of inflation and retail sales data ahead of next week’s highly anticipated meeting of the Federal Open Market Committee to discuss monetary policy. Some support was also seen from encouraging economic data coming from China. The VIX is trading near 14 this morning, reflecting relative calm on Wall Street. The dollar index is trading lower near 104.6 in early trade. Yields on 10-year Treasuries are trading near 4.30%, while yields on 2-year Treasuries are trading near 4.99%. Crude oil prices are probing fresh nine-month highs, while grain and oilseed prices traded mixed overnight.
This week will largely be about inflation and retail sales data on Wall Street. We’ll get consumer price data on Wednesday, and producer price data on Thursday, to go along with retail sales data to be released on Thursday as well. Those numbers provide the final piece of the puzzle for policymakers who will be discussing monetary policy at the Federal Reserve meeting next week. The data points that we’ll see will be for the month of August, when the average consumer saw much higher gasoline prices at the pump. As such, the market expects month-on-month headline inflation to be up 0.6%, and year-on-year to be up 3.6%. However, the trade expects that core inflation that excludes food and energy prices will remain unchanged at 0.2% month-on-month, while dropping to 4.4% year-on-year. The doves will want to ignore the energy prices, saying that it’s the “core” inflation data that matters, while the hawks will want to argue that commodity inflation was a major contributor to the inflation that we saw post-Covid, on top of supply chain issues and labor shortages.
The hawks will also argue that labor shortages continue to be a problem keeping us above the 2% inflation mandate. We are seeing an easing of the job market to some extent, largely due to employers slowing their hiring. They’re still hiring an average of 150K per month, which exceeds the 100K natural increase in labor supply due to population growth, but the hire rate has slowed dramatically. The job opening to available worker ratio has dropped below 1.5, down from nearly 2.0 at the peak, but it needs to get closer to 1.0. Employers are not laying off many employees. They recognize how hard it’s been to fill positions, and they want to hang onto their good employees at all costs, and that means sufficient pay raises to keep them there, contributing to the ongoing wage inflation. The pervasive talk on Wall Street of a soft landing feeds that hope by employers that we’re going to be turning the corner soon, so therefore they have incentive to hang onto their best employees.
New loans are picking up the pace in China, suggesting an increase in optimism by businesses and homeowners. New loans rose to 1.36 trillion yuan in August ($186 billion), up from 346 billion yuan ($47.4 billion) in July. That was higher than the 1.2 trillion yuan expected by analysts and up 8.8% year-on-year. But a breakdown of the data gives a bit more insight, Middle- to long-term loans to businesses totaled 644 billion yuan ($88 billion), down 12.4% year-on-year and the second month of contraction following a decline of 21.6% in July. In other words, businesses remain reluctant to take on more debt, despite all the talk of incentives, and despite the cheap money being offered. Yet, middle- to long-term loans to homeowners increased by 160 billion yuan ($22 billion) in August, bouncing from a negative growth of 67.2 billion yuan in July, but still nearly 40% lower than the previous year’s pace in the middle of Covid lockdowns and restrictions. China recently provided incentives for buying homes, including lower interest rates and lower down payment requirements that produced a short-term surge in home buying. It’s yet to be seen whether that momentum will be sustained sufficiently to bail out its property market.
This week’s commodity markets will be focused on tomorrow’s USDA WASDE crop report, that will provide our best look to date at the size of this year’s summer crops, with significant market implications. I’m squarely in the camp of those believing that this year’s crops are getting smaller due to adverse weather at the end of the growing season, but the question will remain over whether they will get small enough to offset demand problems? That’s more of a concern for corn, which has a larger balance sheet. Export demand is already weak due to massive increases in Brazilian production, but low river water levels and the Panama Canal drought problems will contribute to that weakness as well. Tomorrow’s report will provide our best look at this year’s crops to date, setting the trend for future reports. Smaller crops tomorrow will argue for even smaller crops in October. The debate over the scope of the decline will continue, but the trend will be what tomorrow’s report should set in place.
