Perspective: Morning Commentary for November 15

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

November 15 – Stocks fell as Treasury yields popped following this morning’s economic data release. The VIX is trading near 15 this morning, while the dollar index is trading near 106.7. Yields on 10-year Treasuries are trading near 4.48% as they trade near their recent highs, while yields on 2-year Treasuries are trading near 4.36%. Crude oil prices are nearly 1% lower, while the grain and oilseed markets were mixed to firmer overnight in bargain buying, led by strong gains in soyoil, while corn prices struggled in inter-market spread trading.

Retail sales rose by 0.4% month-on-month in October, up from analyst expectations of 0.3% gains. Furthermore, the September number was revised to 0.8% gains, which doubled what was originally reported last month. However, retail sales minus vehicles rose just 0.1% on the month, down from expectations of 0.3%, although the previous month’s growth was doubled to 1.0% growth. Retail sales minus both vehicles and gas grew by just 0.1% as well, down from expectations of 0.4% growth. The previous month’s gains were revised to 1.2%, up from the 0.7% gains originally reported. This was a mixed bag for the market to digest, suggesting strong sales in September that lost some momentum in October.

But the Empire State manufacturing index surprised the market with strong expansionary signals this month. The index rose to 31.2 this month, reflecting a dramatic turnaround from the -11.9 posted in October. A positive number reflects month-on-month growth, while a negative number reflects contraction. Analysts had expected the index to come in close to 0.0, reflecting stable conditions with neither growth nor contraction. Today’s reading for the New York manufacturing sector is the strongest in nearly three years. It reflected substantial gains in both new orders and shipments. Labor conditions pointed toward steady employment levels in the survey, while the average workweek lengthened. The pace of input and selling price increases remained modest, similar to the previous month. Surveyed firms remained optimistic about the six-month outlook.

We also had some inflation data come out this morning, with both import and export prices rising last month. Import prices rose 0.3% on the month in October, reflecting a reversal from the 0.4% declines seen in the previous month, and stronger than the 0.1% declines expected by analysts. Import prices were up 0.8% year-on-year in October, which was stronger than the -0.1% expected. This suggests that we’re starting to import inflation again. Export prices rose 0.8% month-on-month in October, reversing the -0.7% seen in September, and stronger than the -0.1% expected by analysts. Export prices came in at -0.1% year-on-year in October, versus -2.1% in September.

Ten-year Treasury yields slipped just below 3.60% on September 17, the day prior to the Federal Reserve’s 50-basis point rate cut. They are now trading near 4.48%, with the 4.50% level offering some resistance on the charts currently. The markets have spent the past two months trading a combination of factors that they believe reflects re-inflation risks, and we saw some of that in the above data this morning. That sense was compounded by the election win garnered by Donald Trump last week, which the markets believe will also result in greater upward pressure on inflation due to a better economic growth scenario, combined with tariffs. Those factors have dramatically impacted the currency and commodity markets over the past 10 days in particular.

Chinese retail sales gained 4.8% year-on-year in October, led by stronger domestic consumption, following China’s big stimulus announcement in late September, up from 3.2% growth seen in September, and above analyst expectations of 3.8%. January to October sales are up 3.5% year-on-year, but that still falls short of the official annual growth target of 5%. Massive consumption subsidies and coupons spurred sales in many consumer categories in October, including cosmetics, beauty products and appliance sales being up 40% year-on-year. Sports equipment and entertainment were up nearly 27%. However, spending in categories beyond the government stimulus incentives showed little to no signs of improvement. For example, catering was up just 3.2%, down from the 5.9% pace overall for the first 10 months of the year. Those stimulus packages helped lower the overall urban unemployment rate to 5% in October, while industrial output rose by 5.3% year-on-year. However, power output gains slowed dramatically to just 2.1% growth year-on-year, down from 6% growth in September and the slowest growth rate of the year. This is a red flag for China’s economy, as power output growth is often seen as an indicator of actual economic growth, or the lack thereof. Concerns have particularly peaked following this month’s U.S. election in which Donald Trump was elected to be president for the next four years. There’s a great fear within China that his election will result in lower foreign direct investment, further deleveraging of U.S. buying of Chinese made products, and an increased risk of a trade war that could further strangle the Chinese economy.

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