Perspective: Morning Commentary for July 12

July 12 – Stock futures were quietly mixed overnight, following a bearish reversal yesterday for the Nasdaq and the S&P 500 stock indices, as traders waited for this morning’s inflation data and the start of earnings season. The VIX continues to trade largely between 12 and 13, while the dollar index is trading near 104.2. Yields on 10-year Treasuries are trading near 4.21%, while yields on 2-year Treasuries are trading near 4.49%. Crude oil prices are back above $83 per barrel this morning, while the grain and oilseed markets were weaker ahead of today’s big USDA WASDE crop report, which is expected to reinforce ideas that both domestic and global stocks are quite adequate for the time being.

The producer price index rose 0.2% month-on-month in June, up from analyst expectations of 0.1%. Furthermore, the May number was revised from -0.2% up to 0.0%. The headline PPI increased to 2.6% year-on-year in June, up from analyst expectations of 2.3%. The May number was revised to 2.4%, up from 2.2% originally. The core PPI that excludes food and energy costs rose to 0.4% month-on-month in June, which was double analyst expectations of 0.2%, and up from 0.3% in May, which was a revision higher from the 0.0% originally reported. The core PPI rose 3.0% year-on-year in June, up from analyst expectations that it would remain at 2.3%.

The big inflation culprit in the June PPI was in the trade services category. The PPI minus food, energy and trade services was flat in June, which was down from 0.2% the previous month, while it also dropped to 3.1% year-on-year, down from 3.3% the previous month. Trade services is calculated on margins between prices paid and prices sold, which can lead to more volatility since you’re dealing with movement on both ends of the margin. So, while alarming, we need to see another month or two of data to identify where this is an anomaly or a trend. Treasury yields popped and stock futures broke lower when the numbers were originally released, but then both quickly returned to trade near where they were prior to the data’s release once analysts were able to read through the data. Wall Street will choose to see today’s numbers as an aberration until / unless it sees subsequent reports confirming a trend of higher prices.

Chinese exports rose impressively in June, but that too was likely an anomaly. Chinese exports rose 8.6% year-on-year in June, above analyst expectations of 8.0%, and up from 7.6% growth in May. Shipments to the United States were up for the second consecutive month, rising 6.6% in June, up from 3.6% in May. This represents a significant change from the recent trend, as exports to the United States have generally been in decline over the past two years. Why the change in direction? The Biden Administration’s big punitive import tariffs went into effect on July 1. It is widely believed that shippers were rushing to get impacted products delivered prior to the tariff increase. As such, Chinese exports to the United States are expected to see a sharp decline in future data releases. The same pattern is seen for shipments to Europe as well, with a series of punitive tariffs implemented by the economic block against China, similar to the U.S. tariffs. Exports to the European Union rose 4% year-on-year in June. Meanwhile, shipments to members of the Association of Southeast Asian Nations rose by 15% year-on-year in June, slowing from 22.5% growth in May, while shipments to Russia fell by 8.1%, following a decline of 5.1% in May. China’s exports to Russia are down 1.2% year-on-year for the first half of this year, after being up 76.9% the previous year. Could Russia’s economy be running out of money to import?

Chinese imports dropped 2.3% year-on-year in June, going contrary to analyst expectations of a 2.8% increase. This would seem to suggest that manufacturers see a slump in demand coming, so they therefore imported fewer commodities for producing goods and services going forward. Crude oil imports fell 2.3% year-on-year in June to their lowest level in 16 months. That’s the product of a sluggish economy, but it’s also reflective of China’s shift toward green energy. Meanwhile, liquified natural gas imports rose 14.3% year-on-year in June, although the rate of growth has continued to slow over the first half of the year. Iron ore imports rose 6.2% year-on-year in June, but that’s down from 7% growth the previous month.

USDA will update its domestic and global commodity balance sheets in its July WASDE report to be released at 11 a.m. Chicago time this morning. The trade is braced for a bearish report that reinforces expectations for ample supplies of corn, soybeans, and wheat currently. But the primary focus will be on the global balance sheet. Will USDA make notable changes to Black Sea wheat and corn production estimates, as well as Argentine and Brazilian corn production estimates? Modest reductions are expected, but traders would take notice if the declines are more significant, with positive implications for U.S. exports. The Black Sea continues to battle hot dry weather.