Perspective: Morning Commentary for October 11

October 11 – Today’s wholesale inflation numbers were relatively tame, supporting modest gains by stock futures on their release as we close out the week. Additional support comes from bank beats on early earnings reports. However, China stimulus details again fall short, leading to more losses in its markets, while limiting strength in the U.S. markets. The VIX is trading near 21 again this morning, while the dollar index is trading near 102.9. Yields on 10-year Treasuries are trading near 4.10%, while yields on 2-year Treasuries are trading near 3.96%. Crude oil prices are trading modestly lower today as they pull back a bit from recent gains, while grain and oilseed prices traded mostly higher with modest gains ahead of today’s USDA WASDE crop report.

The headline producer price index was flat in September, versus analyst expectations that it would rise by 0.2% month-on-month as it did in August. The headline PPI rose 1.8% year-on-year in September, up from 1.7% the previous month, and above analyst expectations that it would fall to 1.6%. Core PPI, that excludes the food and energy sectors, rose 0.2% as expected in September, which is down from 0.3% in August. Core PPI rose 2.0% year-on-year in September, down from 2.4% the previous month, and down from analyst expectations that it would rise to 2.7%. The PPI minus food and energy and trade services rose 0.1% month-on-month, which is down from 0.3% the previous month, while rising 3.2% year-on-year, down from 3.3% the previous month.

Both the hawks and the doves can find something to highlight in this report, but the PPI carries less weight than the CPI data that we saw yesterday. It was yesterday’s data that further cooled expectations of more significant rate cuts from the Federal Reserve. Cuts are still expected by the market, but not nearly as aggressively as was being priced in a few weeks ago. Fed fund futures continue to price in 82% odds of a 25-basis point rate cut at the November Federal Reserve meeting, with 78% odds of another 25-basis point rate cut in December, but there’s also nearly 1 in 4 odds of just one rate cut between now and the end of the year. In the end, it will likely hinge on the next monthly jobs report coming out in early November.

China’s stock market saw another day of losses today, which has largely been the story since traders returned from the week-long National Day holiday on Tuesday. In fact, the major stock indices have retraced nearly half of their pre-holiday gains already as authorities continue to fall short of expectations on details of its stimulus promises. China got what it wanted in the pre-holiday market rally to help boost consumer sentiment, but it’s been unable to sustain that momentum, which risks even greater damage to sentiment in the end. The rally got its start from state-backed funds actively buying, which turned momentum upward. It was at that point that private funds began buying into the rally. We noticed that state-backed funds would buy when momentum started to wane, bringing back the private money. However, that hasn’t worked this week. Attempts to rebuild momentum with buying by state-backed funds have largely failed this week, with private funds losing confidence in the governments stimulus program, as well as in the market’s ability to sustain strength. This is a critical time for Chinese policy if it’s going to turn things around economically.

Taiwan celebrated its National Day holiday celebrating 75 years of control of the island nation on Thursday. President Lai Ching-te gave his speech as expected, proclaiming that the People’s Republic of China was not the motherland of Taiwan. That brought a sharp response from China’s foreign ministry, condemning his behavior as deliberately seeking to sever the historical connection between the two sides that are separated by the Taiwan Strait. For his part, China’s President Xi Jinping made his speech at the opening of China’s National Day celebration, stating that “We must promote the spiritual harmony of compatriots on both sides of the strait, and resolutely oppose ‘Taiwan independence’ separatist activities.” The Chinese military intensified patrols around the island following Lai’s speech, sending more fighter jets and drones to Taiwan to send a message, but it refrained from taking additional action. China would prefer not to have to take aggressive military action to “reunite” Taiwan to the Mainland, but its actions do increase the risk of accidental war, and Xi has promised to eventually fulfill his promise of “reuniting” Taiwan to the Mainland.

Today is USDA WASDE crop report day. No major changes are expected to the balance sheets, but that’s what makes for surprises. Black Sea rains should be limited to mostly central Ukraine and areas to the west. Russia increased wheat export taxes by 41%, but that’s only $5 to $6 per metric ton. Good rains are expected across much of Brazil’s soybean belt to boost planting in the days ahead. Meanwhile, harvest progress remains aggressive in the Midwest due to the crop’s rapid dry down this year, which is stretching storage facilities to their limit.