Perspective: Morning Commentary for May 15

May 15 – Today is all about inflation and retail sales, which were the focus of a couple of reports this morning. Stock futures rallied on the data release. The VIX is trading near 13, while the dollar index is trading near 104.5. Yields on 10-year Treasuries are trading near 4.37, after setting a five-week low, while yields on 2-year Treasuries are trading near 4.75%. Crude oil prices are nearly 1% lower, while the grain and oilseed markets were mostly higher, led by wheat on lower Russian production estimates.

The consumer price index rose 0.3% month-on-month in April, matching analyst expectations, but down from 0.4% in March. The CPI rose 3.4% year-on-year in April, matching analyst expectations, but down from 3.5% the previous month. Core CPI that excludes the more volatile food and energy sectors also rose 0.3% month-on-month in April, matching analyst expectations, but down from 0.4% the previous month. Core CPI rose 3.6% year-on-year in April, matching analyst expectations, but down from 3.8% the previous month. Wall Street is celebrating today’s inflation numbers, since they show a decline from the previous month and since they matched analyst expectations. But this doesn’t acknowledge the fact that today’s data doesn’t get us back to the 2% mandate. Maintaining this monthly pace the rest of the year would have the core CPI close to the 4% level, which is twice the 2% mandate. That does not give the Federal Reserve room to cut rates. In fact, it’s an argument for a rate hike, which Fed Chair Jerome Powell has essentially ruled out in recent comments. Sticky inflation with a promise for no more likely rate hikes communicates to fund managers that hard assets will be in demand.

Retail sales were flat in April, falling below analyst expectations of 0.4% month-on-month growth, and falling below the 0.6% growth seen in March. Retail sales minus vehicles rose 0.2% month-on-month in April, matching analyst expectations, but down from 0.9% the previous month. Retail sales minus vehicles and gas fell 0.1% month-on-month in April, which was below analyst expectations of 0.1% growth, and down from 0.7% the previous month. These numbers suggest that the economy is stagnating, Sticky inflation with a stagnant economy is stagflation.

Russian President Vladimir Putin is scheduled to visit China to meet with President Xi Jinping on Thursday and Friday of this week. Initial reports indicate that Putin had requested the meeting with Xi. The official line is that the two will discuss trade deals involving energy and agriculture, but the Ukraine war is certain to be a topic of discussion as well. Xi’s recent trip to several European countries reportedly resulted in those leaders encouraging Xi to use his influence to seek an end to Russia’s war on Ukraine. China is eager to be seen as the world’s peace maker as it seeks to assume the role of world leader. Previous efforts to broker peace between Russia and Ukraine were used to cast blame at the United States for the conflict, while not resulting in any resolution to it.

Wheat prices led the grain and oilseed sector higher overnight, with prices also receiving an additional boost on this morning’s inflation data release, as the dollar followed Treasury yields lower. The primary driver for wheat prices continues to be Russian weather concerns. Russia has largely set the world cash price for wheat over the past couple of years, as it dumped record volumes of cheap wheat onto the market to help pay for its war effort following a couple of bumper crops. That allowed the market to ignore a trend toward tightening supplies among the other major world exporters, but that trend toward tightening supplies becomes the focus again if Russian production falls sufficiently to curtail its exports. Its estimated that Russia will have 4 – 5 million metric tons of surplus old-crop stocks on hand above its normal level at the end of the marketing year to work through. As such, we estimate that the pivotal production number is around 85 mmt for when it would start to impact global trade – particularly in the last half of the 2024-25 marketing year. Russia states that recent freeze damage will require replanting of crops on 500,000 hectares, on top of the existing drought problems that are negatively impacting at least a third of Russia’s winter wheat crop, and up to half of Ukraine’s crop. The market appears to be trading a Russian production number of 84 – 86 mmt currently, while weather over the next several weeks could still drop that well into the low 80s. Russia’s SovEcon dropped its estimate to 85.7 mmt today, after IKAR dropped its to 86 mmt yesterday.

The U.S. industry wheat crop tour currently occurring in Kansas revealed good yield potential on day one, although it will travel through southwestern and south-central Kansas today, where freeze and drought damage will be more prevalent. Midwest planting delays remain a concern for corn and soybean traders as well. Commodity Weather Group expects the best seeding opportunities to be in the northern Midwest this week, and again in the 11- to 15-day period, but progress will be difficult elsewhere if the current forecast verifies. Some models hint at some possible improvement at the end of the month, but confidence is currently low.