Perspective: Morning Commentary for April 26

April 26 – Wall Street talk is all about inflation again today, following a couple of days of key data that will surely have an impact on the Federal Reserve’s monetary policy decisions when it meets next week. This morning’s numbers help add color to yesterday’s numbers, depending on how you interpret it. Wall Street interprets data through a filter of what it wants/fears – as we all do. Thus far, Wall Street is interpreting the data through a filter that allows it to focus on the light at the end of the tunnel, that it believes represents daylight, and not the feared train.

Stock futures added to overnight gains when the data was first released this morning, although it didn’t take long before they came off those highs. The VIX is trading near 15, so there’s no sense of panic on Wall Street by any means. The dollar index followed Treasury yields lower on the data release, trading near 105.7 currently. Yields on 10-year Treasuries are trading near 4.67%, coming off their highs when the data was released, although still just below levels not seen in nearly a half year. Yields on 2-year Treasuries are trading near 4.98% as they continue to “get comfortable” around that pivotal 5% level. Crude oil prices are nearly 1% higher at this hour, while the grain and oilseed sector mixed to weaker.

This morning’s PCE data was a bit hotter than expected on the year-on-year inflation data, supported by stronger consumer spending, although month-on-month numbers came in as expected. Personal income grew 0.5% month-on-month in March, up from 0.3% the previous month, but matching analyst expectations. Personal consumption expenditures (PCE) rose 0.8% month-on-month in March, reflecting a more confident consumer. That matched the previous month’s spending, but it came in above analyst expectations of 0.6%. The headline PCE price index rose 0.3% month-on-month in March, matching both the previous month and analyst expectations. PCE prices increased 2.7% year-on-year in March, up from 2.5% the previous month, and exceeding analyst expectations of 2.6%. Core PCE inflation, that excludes the more volatile food and energy sectors, also rose 0.3% month-on-month. That also matched the previous month’s pace, as well as matched analyst expectations. Core PCE inflation rose 2.8% year-on-year in March, matching the previous month’s pace, but exceeding analyst expectations of 2.7%.

So, how does Wall Street interpret all of these numbers? Wall Street’s take is that the economy is still growing. It may not be robust, and there are problem areas, but it is growing. Inflation is sticky, period. It’s coming to a realization that we are not being effective at getting down to the 2% mandate. Our progress toward the 2% target stalled when the Fed quit raising rates. Wall Street doesn’t expect another rate hike. That would catch it by surprise. The Fed likes to be transparent, and it has not given that indication. I still cannot rule out another rate hike, but I agree that the Fed is not likely to do so without “preparing” the markets for it. Rather, the Fed is still focused on holding rates where they are until they make more progress on reaching the 2% mandate. The problem is, we’re not making progress. Has the Federal Reserve unofficially accepted a higher mandate? It would say no, but in effect it has done so. Our core CPI has been at 3% or higher now for three years. That doesn’t look to me like a commitment to the 2% mandate. But the bigger question that Wall Street is currently wrestling with is, when will the first rate cut come? My answer to that is, the data isn’t really giving us a reason for the Fed to cut rates currently, and doing so now would stimulate the economy. A rate cut now would be either politically motivated, or it would mean that the economy is in trouble. There’s little evidence of that in this week’s data.

Strength in the grain and oilseed sector stagnated overnight, but that’s not unusual. Much of the recent strength has been met by overnight selling, with strength then returning following the morning pause. Wheat continues to be the leader in the complex, although prices are now getting into over bought territory. Fund short covering has been orderly thus far, with few signs of panic. It’s still early, with plenty of time yet for weather conditions in the Plains, Europe, and Russia to improve. Rains again missed key production areas of the central and Southern Plains overnight, where we may see another week of declining condition scores reflected in Monday’s numbers. However, the key area to watch is southern Russia. That’s the area that’s been driving world prices lower over the past year plus. That’s where the world cash price is essentially set. Russia is still pushing cheap wheat out through its ports at a record pace, keeping the world supplied.

This week’s rains should provide more relief for many remaining dry areas of the southwestern Corn Belt, where soil profiles are still lacking moisture. That helps set the stage for a good growing season if it happens as forecast. But we need to keep our eyes on South America. We have about a 600-million-bushel buffer in excessive US old-crop stocks, so the market has to be careful not to react to quickly to problems in South America to ration demand. Even so, we could see Argentine production drop by 7 – 10 mmt, with similar losses still “possible” in Brazil, depending on weather in the coming weeks. Look for USDA to ratchet production estimates for both lower in its May report, with more cuts in June.