Perspective: Morning Commentary for April 25

April 25 – Stock futures came under pressure overnight, ahead of this morning’s weekly jobless claim and gross domestic product data release for the first quarter of this year. Stock futures came under additional pressure as Treasury yields and the dollar rallied on the data release, which painted a mixed picture for the economy. The VIX is trading near 17, while the dollar index is trading near 106.0. Yields on 10-year Treasuries are trading at almost six-month highs currently near 4.74%, while yields on 2-year Treasuries are trading near 5.02%. Crude oil prices are modestly lower on the above, while the grain and oilseed sector was quietly mixed overnight.

First quarter GDP grew at an annualized rate of 1.6%, down from 3.4% in the previous quarter, and below analyst expectations of 2.3%. Personal consumption expenditures grew at a 2.5% annualized rate in the first quarter, down from 3.3% the previous quarter, and below analyst expectations of 2.8%. Those numbers suggest that the economy was slowing in the first quarter, raising trader hopes that perhaps the Federal Reserve might be able to cut rates this year after all. However, those hopes were dashed when traders saw the imbedded inflation data in the report. The personal consumption expenditures price index – a key inflation data point followed closely by the Federal Reserve – rose 3.4% during the first quarter, which is its biggest rise in a year. The core PCE price index that excludes the more volatile food and energy components rose 3.7%, which is nearly twice the Fed’s 2% mandate. This then became the focus of traders, as they realized that the Fed simply cannot afford to cut rates when inflation pressures are rising. Doing so would be expected to add to those reinflation pressures.

First-time claims for unemployment benefits fell to a low 207K in the week ending April 20, down from 212K the previous week, and below analyst expectations of 215K claims. This dropped the four-week moving average to 213.25K claims, down from 214.5K the previous week. Furthermore, continuing claims for the week ending April 13 dropped 15K to a very low 1.781 million, with the four-week moving average falling 7,250 to 1.794 million. This suggests a tightening jobs market. The bottom line then for today’s data is that the economy became a bit more stagnant in the first quarter, but with increasing inflation pressures, followed by a tightening job market in April, which may add to wage inflation pressures.

Fed fund futures trading gave 99.7% odds this morning that we would see no rate change next week when the Federal Open Market Committee meets to discuss possible monetary policy changes, up from 96.5% yesterday. Traders only give 14% odds now of a June rate cut and 39% odds of July rate cut. A September rate cut is still expected, but I don’t think we get a rate cut ahead of the elections unless the economy takes a sharp turn downward in the weeks ahead. Comments made by central bankers following the March meeting suggest to me that they wanted to make a cut or two this year, but it’s becoming increasingly clear that doing so will not be possible without paying the price of re-energizing inflation, as we’ve been saying for the past six months. There are simply too many structural issues in the economy yet that support ongoing inflation pressures, keeping us far above the elusive 2% mandate that Fed Chair Jerome Powell insists that he is bent on reaching, although I’m doubting his conviction.

That creates more challenges for China, but today’s news does provide some hope for its economy. China’s office building market picked up a bit of momentum in the first quarter of this year, suggesting improving business sentiment. A report published by JLL showed vacancy rates of office buildings in major Chinese cities dropping notably in the first quarter, with rates increasing in just two of the 40 surveyed cities. Firms engaging in e-commerce live streaming, educational services, and small loan services were most active in the office rental market. That said, rental rates for office space still posted modest declines during the quarter. Additional optimism came from China’s Central Bank today, which hinted that it could resume trading treasury bonds in the secondary market for the first time since such was suspended in 1997. No details or timelines were announced, but the comments sparked a debate in financial circles about whether this was the PBOC’s way of engaging in quantitative easing for stimulating China’s economy? Major stimulus is still not expected though, as it would be expected to weaken the yuan at a time when the dollar is strong – something that China is bent on avoiding.

Wheat futures continue to trend higher, approaching over-bought conditions on the charts. Initial support came from speculative buying to cover a portion of their massive short positions on reports of deteriorating crop conditions in the U.S. central and southern Plains, Europe, and in southern Russia. The global cash market shows little sign of concern yet at this point, but fund managers are reducing their risk exposure, with more buying coming as chart signals turn higher. Longer-term, we’re going to need support from a tighter cash market to support the rally.