Perspective: Morning Commentary for July 26

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

July 26 – Wall Street responded to today’s inflation data with a yawn when it was released this morning. The numbers provided brief fodder for the Algos, but the overall reaction was rather muted. The VIX continues to trade above 17 at this hour, reflecting elevated concerns held on Wall Street about its own optimism, although the tech sector continues to feel the pain of the recent rotation trade – or as some say – the Trump trade. The dollar index is trading near 104.3 today, which is off its spring high of 106.5, but it is still quite high relative to some of its rivals in global commodity trade, and considerably higher than many of its customers’ currencies as well. Yields on 10-year Treasuries are trading near 4.21%, while yields on 2-year Treasuries are trading near 4.39% - both of which traded lower following the release of this morning’s inflation data. The broader commodity sector is under some pressure this morning, with crude oil prices 1% lower and the grain and oilseed markets mostly lower – the exception being Minneapolis wheat as heat and dryness add stress to the U.S. and Canadian spring wheat belt.

Personal income rose 0.2% month-on-month in June, down from a downwardly revised 0.4% the previous month, and below analyst expectations of 0.4%. Personal consumption expenditures rose 0.3% month-on-month in June, which matched analyst expectations, but it was down from an upwardly revised 0.4% the previous month. Headline PCE inflation came in at 0.1% month-on-month in June, matching expectations, and up from 0.0% in May. Headline PCE inflation was up 2.5% year-on-year in June, again matching expectations, and down from 2.6% the previous month. Core PCE inflation that excludes the more volatile food and energy sectors rose 0.2% month-on-month in June, up from expectations of 0.1%, and up from 0.1% the previous month. Core PCE inflation rose 2.6% year-on-year in June, up from analyst expectations of 2.5%, but unchanged from the previous month.

Perception is reality in the markets, and the perception continues to be that we are making strides toward reaching the 2% inflation mandate. That’s what Wall Street wants to believe, and so therefore that is its reality. The question is, will that be the Federal Reserve’s reality as well? Its members have felt the criticism of the past several years, and the continuous accusations that its decisions are hurting everyday Americans. Nobody is comfortable living with that criticism and pressure month in and month out, which has continued for the past several years. As such, I believe that the Fed wants to be seen as the “good guys” once again. Intellectually, they hold to their conviction that they must not repeat the mistake of 1980 and cut rates too quickly, which led to a resurgence of inflation that became difficult to control without drastic and painful actions. They intellectually see re-inflation pressures in other countries that were quicker to make rate cuts. But emotionally, it becomes easy to justify “throwing Wall Street a bone” by giving it a rate cut. As such, look for the language from the Fed to change next week when the Federal Open Market Committee releases its updated policy statement, and when Fed Chair Jerome Powell conducts his press conference. The purpose would be to prepare the market for a September rate cut, although the words themselves may be as effective as the rate cut itself, making it more difficult to actually do the cut. On the other hand, failure to give Wall Street what it wants could amp up the disappointment on Wall Street.

Either way, the Fed’s work becomes increasingly difficult as we move forward, unless Congress can do what it has been unable to do for a long time – contain the fiscal debt. It will become more difficult for the Fed to keep a lid on longer-term interest rates without jumpstarting quantitative easing once again in order to maintain demand for the constantly growing supply of debt certificates. We increasingly find ourselves in the position where Congress is borrowing money to service the debt already in place, with the annual cost of doing so rapidly approaching $1 trillion. The cost of servicing the debt was easy to absorb when interest rates were near zero, but they become increasingly more difficult to manage as interest rates go higher.

August is just around the corner, and that means that the commodity markets intensify their focus on the size of this year’s corn and soybean crops. StoneX will release the results of its first customer survey-based yield estimates on August first, which will be the first of many private estimates based on surveys and field tours in August. USDA projects new-crop corn ending stocks at just shy of 2.1 billion bushels, with 2024-25 soybean ending stocks at 435 million bushels. Will the heat of the coming days, combined with areas of dryness, be enough to draw those stock levels down to levels that would justify rationing demand with higher prices? That will be the debate taking place in the markets over the next 30 days. USDA’s August 12^th WASDE crop report will include production estimates based on satellite data and farmer surveys, so we should see a change in yield. The survey data collected for that report will be collected over the next 10 – 11 days. Stress increases in the western belt during that time, while conditions should be more favorable for the eastern belt.

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