Perspective: Morning Commentary for January 11

January 11 – The possibility of a rebound in inflation is the topic of conversation on Wall Street following the release of hotter-than-expected numbers this morning, along with low weekly jobless claim numbers. This morning’s consumer price index data led stock futures to turn lower, while the dollar index followed Treasury yields higher as traders started to worry about resilient inflation stickiness. Yet, the VIX remains below 13 this morning at nearly two-week lows following the release of the CPI data, even with declining stock futures. The dollar index is trading near its session high at 102.5 at this hour. Yields on 10-year Treasuries are trading near 4.02%, while yields on 2-year Treasuries are trading near 4.34%. We also saw modest selling across the commodity sector when this morning’s data was released, although the grain and oilseed sector was also reacting to dismal export sales data released at the same time. Crude oil prices are trading 2% higher at this hour, after Iran seized a Marshall Island-flagged ship in the Gulf of Oman that Iranians claim is American, while the grain and oilseed sector is quietly mixed ahead of tomorrow’s big set of USDA crop reports.

Headline CPI rose 0.3% month-on-month in December, up from 0.1% the previous month and exceeding analyst expectations of 0.2%. The CPI was up 3.4% year-on-year in December, up from 3.1% in November and exceeding analyst expectations of 3.2%. Core CPI that excludes the more volatile food and energy sectors also rose 0.3% month-on-month in December, matching the previous month’s upward pace, while exceeding analyst expectations that it would drop to 0.2%. Core CPI rose 3.9% year-on-year in December, down from 4.0% in November, but above analyst expectations that it would fall to 3.8%.

A breakdown of the December CPI data shows that fuel oil dropped 5.5% on the month, while natural gas prices into the home fell 0.4%. It makes one wonder what the December inflation numbers would have looked like without relatively tame energy prices. Gasoline prices rose 0.2% on the month. But it was concerning to see significant gains in inflation pressures for other items. Motor vehicle insurance rose 1.5% on the month, continuing a strong upward trend, while airline fares added another 1% as well, and hospital services were up 0.5%. Shelter costs also rose 0.5% on the month in December, picking up the pace from what we’d seen in previous months. Used cars and trucks also added 0.5% during the month, while new vehicles were up 0.3%, reflecting consumers coming back into the market as the Federal Reserve sounded a softer tone. Electricity prices rose 1.3% in December, while meat prices rose 0.5%.

First time claims for unemployment benefits slipped to 202K in the week ending January 6, down slightly from 203K the previous week. That dropped the four-week moving average to 207.75K claims, down from 208K the previous week, and a very low number reflecting a healthy jobs sector. Continuing claims for the week ending December 30 fell 34K to 1.834 million, with the four-week moving average dropping 8K to 1.862 million. The above numbers, combined with this morning’s inflation data, create problems for those on Wall Street holding a rosy picture of a soft landing with low inflation and declining interest rates. Today’s data wasn’t a game changer, as many analysts will simply call it an aberration in an otherwise trend toward lower inflation and a soft landing. But today’s data does fit with my expectations that we would see inflation rebound – albeit I expected it to be later this year. I still wouldn’t be surprised if we saw an additional dip in inflation early this year. That wouldn’t change my view about a longer-term rebound unless the economy were to slip into stronger headwinds.

Grain and oilseed traders continue to consolidate prices ahead of tomorrow’s big USDA data dump. My primary focus will be a) USDA’s adjustments to the size of the 2023 corn and soybean crops, b) adjustments to South American corn and soybean production estimates in light of this year’s weather pattern, c) resulting changes to U.S. export estimates, d) potential surprises in USDA’s quarterly grain stocks survey results, and e) potential surprises in the results of USDA’s winter wheat seedings reports. One thing that USDA may do that the trade does not expect would be to cut U.S. soybean exports for the current marketing year. Both sales and shipments are falling behind as Brazil continues to take market share. The Brazilian cash market shows few signs that its market is worried about a short soybean crop. I also think that we’ll see USDA bump its ethanol demand estimate for corn, although that still doesn’t put much of a dent in the large surplus on the books. I’ll also be looking for potential surprises in the wheat stocks number that could reflect adjustments in USDA’s wheat feeding estimate.