Perspective: Morning Commentary, 12/23/2015

Wednesday, December 23, 2015

December 23 – Consumer spending rose in November by the most in three months, rising 0.3% from October to an annualized $12.43 trillion. The data, which was inadvertently released early, matched Wall Street expectations, but nonetheless provided encouragement on the health of our consumer-driven economy. Consumer spending was flat in October. The stronger November consumer spending should help us maintain economic growth near 2% in the fourth quarter. That’s nothing to get excited about, but at least its growth and it eases concerns about this month’s rate hike pulling us back into recession.

The core PCE price index rose 0.1% in November over the previous month and was up 1.3% year-on-year. This core PCE price index is a favorite data point used by the government to measure inflation pressures minus the more volatile food and energy components. The Fed would like to see inflation hover near 2% in a healthy economy, but its greater concern in recent years has been just to keep it positive.

However, the news wasn’t as positive this morning. Orders for durable goods were flat in November, although that was still better than expectations of a 0.5% decline. Orders surged a revised 2.9% in October, but that was mostly due to an increase in plane orders. November orders excluding transportation were down 0.1% in November, which was weaker than pre-report expectations of flat orders. Durable goods orders tend to be reflective of longer-term consumer confidence in the economy.

Reports on new home sales and consumer sentiment at 10 a.m. EST this morning are expected to cast additional light on that sentiment as we head into the Christmas break. Data released Tuesday showed November existing home sales at an annualized rate of 4.76 million, falling far short of Wall Street expectations of 5.32 million homes and down 10.5% from the previous month. The sharp and unexpected decline captured the attention of Wall Street, where analysts hope that it merely reflects a one-time delay in mortgage approvals due to adjusting to new rules implemented by the government during the month.

The world continues to watch as Argentina implements free-market reforms. President Macri eliminated export licenses for corn and wheat, while also eliminating export taxes for the grains while ratcheting rates lower for the oilseed complex. He then removed most of the controls on currency, allowing the peso to move closer to the black market rate. The two still have not totally converged, but the peso is finding some stability around 13 pesos to the dollar this week.

Some of the first evidence of the reforms working comes from Tuesday’s late-day Egyptian wheat tender. We won’t see the official results on what Egypt decides to do until later this morning, but Argentina is positioned to capture the tender for the first time in three years with the low offer of $4.76 per bushel FOB. Meanwhile, U.S. wheat remains over-priced without assistance programs to help with the price into that region of the world.
Scattered showers continue to provide near-term relief for dry areas of Brazil’s northern corn/soybean belt, where large rainfall deficits continue to be a threat to the crops. Even so, the just-in-time showers should be sufficient to keep areas of significant crop stress to just 20% of the belt. Significant showers are finally expected to surge across these dry northern areas beginning New Year’s Day, remaining active through the remainder of the 15-day period. The market’s focus now will be on the potential for increased crop stress ahead of these rains, along with monitoring to see whether these rains in the longer-term outlook actually move forward in the forecasts as the time approaches.

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