Perspective: Morning Commentary for January 26

January 26 – Stock futures firmed off their lows along with Treasury yields after the release of today’s PCE inflation data as Wall Street anticipates a Federal Reserve pivot along with a recovering economy this year. Yet, the VIX is a bit firmer this morning, trading near 14, as the higher Treasury yields add a bit of nervousness to the Street. The dollar is trading lower at this hour near 103.3. Yields on 10-year Treasuries are trading near 4.14%, while yields on 2-year Treasuries are trading near 4.34%. The broader commodity sector pulled back overnight, with the speculative funds defending short positions, despite more reassurances of support for the Chinese economy. Crude oil prices are nearly 1% lower at this hour, while the grain and oilseed complex is mostly lower as well.

Personal income grew 0.3% month-on-month in December, matching analyst expectations, although down from 0.4% growth in November. However, personal consumption expenditures grew 0.7% month-on-month in December, exceeding analyst expectations of 0.4%, and more than tripling the 0.2% growth pace seen in November. In other words, spending grew at a much faster pace last month than did income, fitting with yesterday’s data showing that the consumer felt good enough about things to step up their spending during the holidays.

The headline PCE price index rose 0.2% month-on-month in December, matching analyst expectations, and stronger than the 0.1% contraction seen in November. The PCE price index rose 2.6% year-on-year in December, which matching the previous month, and it was better than analyst expectations that it would ratchet up to 2.7%. Core PCE inflation that excludes the more volatile food and energy sectors also rose by 0.2% month-on-month in December, matching analyst expectations, although up from 0.1% in November. Core PCE inflation rose 2.9% year-on-year in December, which was down from analyst expectations of 3.0%, and down from 3.2% year-on-year. Overall, this inflation data – which is favored by the Fed – is good news. It shows the anticipated bump month-on-month, but within expectations, while the year-on-year numbers look good. We’re still not down to the 2% mandate, and the final percentage point will be the most difficult, especially with stickiness in shelter and wage inflation. The last thing that the Fed wanted was to see the market get excited about a possible pivot, boosting consumer sentiment, which can make it more difficult to bring inflation down through that last percentage point to the 2% mandate. That is why they are ratcheting up the rhetoric in public appearances, and why I continue to believe that we will not see a rate cut in the first half of this year.

China stepped up support for its ailing real estate market yesterday, at least it stepped up the rhetoric. Chinese officials urged local governments and banks to provide timely support for those real estate companies that are hurting due to the current sluggish property market. Local governments and banks were asked to provide proper funding for the cash-strapped developers. Unfortunately, most of the rhetoric focused on rolling back or swapping the debt, but it mentioned little about solving the problem of poor demand for property. Many banks had previously been unloading real estate debt to reduce their risk exposure, but this asks them to take on more risk, increasing their exposure. China’s stock market surged higher yesterday following the stimulus announced on Wednesday that saw banks inject 1 trillion yuan into the economy by cutting the bank reserve requirement – increasing loan availability. However, that rally lost its energy today, with the major stock indices consolidating. The Shanghai Composite Index edged 0.14% higher today, while the Shenzhen Composite Index pulled back by more than 1%.

This week’s rally in the commodities ran into headwinds overnight as the speculative funds stepped in to defend their short positions, rather than to get out of them. I’ve noted this week that the rally seen in the food and energy commodities had less to do with a change in the fundamentals, but more to do with both end users and speculators growing uncomfortable at these low price levels with the sheer size of the short positions – especially in the grain and oilseed complex – at a time of elevated geopolitical risks. They feared a headline that could create a panic exit of those speculative shorts. Much of that geopolitical risk was tied to Red Sea freight risks, where Houthi Rebels have been attacking ships that were utilizing the Suez Canal. The fears eased a bit today on reports that Chinese officials asked Iran to help rein in the attacks on ships, which were hurting its trade with Europe and the Black Sea region. China’s leverage is that it purchased more than 90% of Iran’s crude oil exports in 2023. Now we wait to see if Iran acts to curb the Houthi aggressiveness toward shipping interests or not as we head into the weekend. Today’s action indicates that the commodities still lack a story on their own sufficient to sustain a rally.