Perspective: Morning Commentary for January 12

January 12 – Inflation data was again front and center on Wall Street today, but it also shared the stage with rising geopolitical risks in both the Middle East and in East Asia. Even so, the VIX is still trading below 13, indicating that traders see no reason to panic as we head into three-day holiday weekend, with the markets closed on Monday for Martin Luther King, Jr. Day. The dollar index is trading near 102.3. Yields on 10-year Treasuries are trading near 3.98%, while yields on 2-year Treasuries are trading near 4.18%, dramatically narrowing the yield inverse. Crude oil prices are nearly 3% higher after rallying to three-week highs on escalating Middle East tensions overnight. Grain and oilseed prices traded modestly higher ahead of today’s big USDA data dump.

The headline producer price index fell 0.1% month-on-month in December, after being flat in November. Analysts had expected 0.2% growth during the month. The PPI rose 1.0% year-on-year in December, up from 0.9% the previous month, but down from expectations of 1.3% growth. Core PPI that excludes the more volatile food and energy components was flat in December, similar to November, but down from the 0.2% gains expected by analysts. Core PPI rose 1.8% year-on-year in December, down from analyst expectations that it would remain unchanged at 2.0%. A breakdown of the data found quite a mix of numbers to the upside and the downside, with some moving opposite of the consumer price index data released yesterday. Most notable, a 12% drop in diesel fuel prices accounted for half of the downward pressure of the PPI, although there were other factors as well. I mentioned yesterday that I see a rebound in inflation later this year, and that yesterday’s rise in the CPI came earlier than I expected. I stated that we may still see further declines in inflation before we see that rebound, and today’s data fits that scenario. Goods inflation continues to decline, but the service sector accounts for the majority of our economy, and inflation remains quite sticky in that sector.

The United States joined with forces from the United Kingdom to strike back at Houthi Rebels in Yemen overnight, hitting more than a dozen strategic locations from which the Houthi Rebels launched attacks on ships in the Red Sea, while also coordinating more than 130 attacks on U.S. troops in the Middle East over the past several months since war broke out in the Gaza Strip. The United State struck 60 targets at 16 different sites in Yemen – sites that included “command-and-control nodes, munitions depots, launching systems, production facilities, and air defense radar systems.” The Houthi Rebels, who are believed to be supported by Iran, have stated that their strikes on U.S. forces and on ships in the Red Sea are in defense of Hamas in the Gaza Strip, and they have vowed revenge against the United States. The sense is that this is all part of the escalation that could result in a spread of the Middle East war, which could eventually reach the point of negatively impacting crude oil output from the Middle East. As such, Wall Street added more risk premium to crude oil prices, while stocks priced in just a bit more risk for the economy from the escalation.

This is a pivotal weekend in our relations with China as voters go to the polls to select their next president in Taiwan. A lot is at stake with this election. Taiwan’s current Vice President represents the Democratic People’s Party, which desires to continue momentum toward independence from China, while the other candidate from the KMT party wants to normalize relations. The DPP is expected to edge out the KMT, but China has been very engaged in using its influence. The results of this election will likely go a long way toward shaping President Xi Jinping’s actions to move closer toward “reunifying” Taiwan in the coming year, deeply impacting its relationship with the United States. Keep in mind that 90% of the world’s advanced semiconductors are made in Taiwan. China wants to control that production, while also closing a 70+ year wound from its history.

This is a big day for the commodities, with USDA making its biggest data dump of the year for the food-based commodities today at Noon Eastern Time. There are bound to be surprises due to the large volume of numbers being released. Key data will include revisions to U.S. 2023 corn and soybean production estimates, revisions to South American production estimates, December 1 quarterly grain stocks survey results, USDA’s winter wheat seedings survey results, and updates to USDA’s domestic and global balance sheets. We could possibly see USDA surprise the trade with a cut in U.S. soybean exports due to the slow pace of shipments as our peak export season comes to a close, while the agency could increase ethanol demand for corn. This report will set the tone leading up to USDA’s March 28 planting intentions survey results release.