September 12 – Stock futures pared their gains, and the dollar index followed Treasury yields lower, following the release of this morning’s data, as Wall Street continues to position ahead of next week’s highly anticipated meeting of the Federal Open Market Committee. However, all of these markets have already started their recovery of those post-report losses. The VIX is trading near 18 this morning, while the dollar index is trading near 101.6. Yields on 10-year Treasuries are trading near 3.67%, while yields on 2-year Treasuries are trading near 3.66%. The broader commodity sector found support once again overnight, with crude oil prices rising by another 1% this morning, while wheat leads the grain and oilseed complex higher ahead of today’s big USDA WASDE crop report.
The headline producer price index rose 0.2% month-on-month in August, up from 0.1% in July, but matching analyst expectations. The PPI rose 1.7% year-on-year in August, down from 2.2% the previous year, and below analyst expectations of 1.8%. The core PPI that excludes the more volatile food and energy sectors rose by 0.3% month-on-month in August, up from being flat in July, and above analyst expectations of 0.2%. The core PPI rose 2.4% year-on-year in August, which was unchanged from the previous month. Like yesterday’s CPI data, lower energy prices were responsible for pulling the headline PPI reading lower, but there continue to be lingering areas of inflationary pressure that are troubling for the market. And what happens when/if energy prices rebound? That question was enough to cast some doubt across the Street once again this morning.
First-time claims for unemployment benefits rose modestly to 230K for the week ending September 7, up from 228K the previous week, but matching analyst expectations. The four-week moving average rose slightly to 230.75K claims, up from 230.25K the previous week. Continuing claims for the week ending August 31 rose by 5,000 to 1.850 million, after the previous week was revised higher by 7,000. The four-week moving average increased by 2,250 to 1.852 million. These numbers trended higher this week, but they still remain within the anticipated range for this time of year, and they are by no means at recessionary levels.
The European Central Bank cut its benchmark interest rate by another 25 basis points this morning as inflation pressures continue to ease and economic growth slows. The markets continue to price in additional cuts going forward, although the ECB has thus far this morning not given clear indication of their future plans. Today’s cut by the ECB is similar to the one done in June, bringing its benchmark rate down to 3.50%. The ECB says that it will continue to make decisions at future meetings driven by the data, which means that its crystal ball is a bit murky as well. The ECB’s statement this morning stated, “Domestic inflation remains high as wages are still rising at an elevated pace. However, labour cost pressures are moderating, and profits are partially buffering the impact of higher wages on inflation.” The focus now shifts to next week’s meeting of the Federal Reserve, with Fed funds futures currently trading just 13% odds of a 50-basis point rate cut next week, while the odds of a 25-basis point cut are now at 87%.
U.S. business confidence in China continues to wane. A survey of 306 American Chamber of Commerce members in China and East Asia showed that less than half of the U.S. companies participating in the survey remain optimistic about China’s five-year outlook, down from 52% the previous year. Just 13% of the survey respondents still rank China as their top investment choice, down from 17% in the previous report. A quarter of the companies cut investment in China last year, with 40% redirecting planned investments to other areas of Southeast Asia and India. This survey reflects the continued deteriorating relationship between China and the United States that continues to hurt China’s economy, while raising geopolitical risks between China and the West.
A Russian missile hit a civilian ship carrying grain in the Black Sea, according to Ukrainian President Volodymyr Zelenskiy this morning. Zelensky reports that the ship was headed to Egypt when it was struck. Details remain few and far between at this point, but it reflects the elevated risks that the war could escalate to the point of adversely impacting the movement of commodities through the Black Sea. This region of the world is the most concentrated area of commodity exports, with significant implications for the food and energy sectors. Otherwise, the focus shifts today to USDA’s WASDE crop report to be released at Noon EDT. Most of the focus is on USDA’s updated U.S. corn and soybean production estimates, but it will be worth monitoring USDA’s wheat production estimates for Russia and Europe. Both private and public estimates have been declining below USDA’s previous estimates, especially for Europe. Food inflation is rising in Russia, and its spring wheat crop was hurt by weather problems. Russian cash wheat prices remain low, but will there be a point at which Russia limits exports, or will the war do so?
