Perspective: Morning Commentary for November 15

November 15 – The good news continues to flow on Wall Street, although today’s response to another serving of good news has thus far been muted. Today’s serving of good news includes inflation from the producer level, as well as retail sales data for October. Traders will also be monitoring headlines coming out of today’s anticipated meeting between China’s President Xi Jinping and U.S. President Joe Biden, although both sides have attempted to cool expectations of significant agreements emerging from the talks. The VIX is trading near 14 this morning, while the dollar index is trading near 104.3. Yields on 10-year Treasuries are trading near 4.51%, while yields on 2-year Treasuries are trading near 4.89%. Crude oil prices are roughly 1% lower as economic concerns raise their head again following this morning’s data release, while the grain and oilseed markets were generally weaker this morning.

The producer price index dropped 0.5% month-on-month in October, while also revising the September number down a notch to 0.4% growth. Analysts had expected 0.1% growth in October. The PPI rose 1.3% year-on-year in October, down from 2.2% in September and well below analyst expectations of 2.0% growth. We know that energy prices fell in October, so we look to the core numbers that exclude the more volatile food and energy sectors to see where we are without that energy influence. The core PPI was flat month-on-month in October, while the September number was revised downward a notch to 0.2% growth. Analysts had expected core PPI to rise 0.3% in October. Core PPI rose 2.4% year-on-year in October, down from 2.7% the previous month. However, higher than expected growth was seen in PPI minus energy and trade services, which rose 0.1% month-on-month and up 2.9% year-on-year. Some of this PPI data flows into the Federal Reserve’s preferred PCE inflation data, which should provide some comfort to Fed members worried about lingering inflation risks.

Retail sales fell 0.1% month-on-month in October, which was better than the 0.3% decline anticipated by analysts, while the September data was revised to 0.9% growth, up from 0.7% originally. Retail sales minus vehicles rose 0.1% month-on-month in October, beating analyst expectations of a 0.1% decline. This category was also revised to 0.8% growth in September, up from 0.6% originally. But retail sales minus vehicles and gas only rose by 0.1% month-on-month in October, falling short of analyst expectations of 0.2% growth, although September was revised to 0.8% growth, up from 0.6% originally. Declining vehicle prices, as reported in yesterday’s consumer price index data, clearly provided a drag to the October numbers, as did declining gasoline prices. However, sales minus gas and vehicles showed a significant decline in October as we head into the holiday shopping season, which should have shown signs of getting started in October.

Stock futures pulled back from early gains on the above data release, suggesting that the market is now convinced that the Fed will be able to pivot its policy next year, as was priced in yesterday, but then pricing in the reality that the economy is slowing down, which needs to be a factor in stock valuations. That weighed on crude oil prices as well, while we saw Treasury yields and the dollar index rally, somewhat as a safe-haven trade. Fed fund futures are pricing in essentially zero odds this morning of another rate hike in this cycle, while they continue to price in expectations of a rate cut by the May meeting, or June at the latest. We don’t expect to see any big market-moving headlines coming out of Xi’s meeting with Biden today at an undisclosed location in San Francisco, but that risk still exists. The main expectation is that communication lines will be reopened in the hopes of avoiding an accidental war between the two superpowers.

Grain and oilseed prices were modestly lower at the pause. Corn and wheat prices continue to struggle in the current environment, lacking any strong story to make traders unwind large speculative short positions. We periodically get a headline to spur some short covering, but then traders use the resulting rally as an excuse to sell these markets again. January soybeans made a new high for the move overnight, focused on production risks from adverse weather in Brazil, but then prices pulled back early this morning as forecast models show increased opportunities for meaningful rain relief as we head into the weekend into next week. Forecasters continue to worry about the longer-term pattern for Brazil, with excessive rains in the South and much drier than normal risks in the Center-West of Brazil continuing into December with occasional times of relief, but as I’ve outlined in recent analysis, that doesn’t necessarily mean that we’ll see enough production loss to justify rationing demand with higher prices. The risks support prices, but the degree to which they justify a sustained rally has not yet been determined.