Perspective: Morning Commentary for April 11

April 11 – Wall Street liked this morning’s inflation data better than it did Wednesday’s data, with stocks rallying following the release of this morning’s producer price index, as Treasury yields give back a portion of yesterday’s gains. The VIX is trading near 16 at this hour, while the dollar index is trading near 105.1. Yields on 10-year Treasuries are trading near 4.53%, while yields on 2-year Treasuries are trading near 4.93%. Crude oil prices are modestly lower as they consolidate just below recent highs, while the grain and oilseed complex was mixed to weaker overnight ahead of today’s USDA WASDE crop report.

The headline producer price index rose 0.2% month-on-month in March, which was down from 0.6% gains the previous month, and below analyst expectations of 0.3%. The PPI was up 2.1% year-on-year in March, which was up from 1.6% in February, but below analyst expectations of 2.3%. Core PPI, which excludes the more volatile food and energy sectors, rose 0.2% month-on-month in March, down from 0.3% in February, but matching analyst expectations. Core PPI rose 2.4% year-on-year in March, up from 2.0% in February, and above analyst expectations of 2.3%. There was a little of something in here for both the hawks and the doves, but keep in mind that Wall Street’s filter through which it views this data is a desire to see the dovish side, and that’s what it focused on in this morning’s data. Perception is reality in the markets.

First-time claims for unemployment benefits fell to 211K in the week ending April 6, down from 222K the previous week, and below analyst expectations of 215K. The four-week moving average was essentially unchanged at 214.25K claims, down slightly from 214.5K the previous week. Continuing claims for the week ending March 30 rose 28K to 1.817 million, but the four-week moving average remains at a relatively low 1.803 million, which was up just 3,500 from the previous week. The job picture remains tight, with today’s data doing little to change that outlook.

China’s consumer price index dropped 1% month-on-month in March, reflecting an ongoing stagnant economy following a short-term stimulus of the Lunar New Year celebration in February. The CPI rose 0.1% year-on-year in March. China’s producer price index, ex-factory prices, was down 0.1% month-on-month and down 2.8% year-on-year in March. The PPI has been trending negative for 18 consecutive months. Deflation can be as damaging to an economy as inflation, and that’s been the greater risk for China over the past couple of years, with the greatest threat being in its property sector, although manufacturing has struggled as well due to deleveraging of Europe and the United States from their previous dependency on Chinese made products. Fitch changed its outlook for China’s sovereign debt from stable to negative on Wednesday, while maintaining it’s A+ rating. This follows a similar move by Moody’s in December, citing concerns over China’s lingering property sector problems, along with its large fiscal deficit. An official of China’s central bank stated early this year that it should have more freedom to induce stimulus into its economy this year as the U.S. Federal Reserve cuts rates here in the States but lingering to reinflation risks here create additional challenges for China’s ability to do so.

Wall Street was convinced that we would see a rate cut in March, following the Federal Reserve’s perceived pivot at its December meeting, amid expectations that we would see four to six cuts this year. At one point yesterday the market pushed that first rate cut back to November, and it was the only one anticipated for the year. This morning the market is pricing in expectations for two rate cuts this year, with the first coming in September. September / November rate cuts get tricky, as the Federal Reserve typically tries to avoid anything that looks political ahead of an election. I stated six months ago that I expected reinflation pressures to return by the second or third quarter of this year, making rate cuts during the year difficult. Those reinflation pressures returned a bit quicker than I expected, largely due to the Federal Reserve communicating intentions to pivot quicker than I expected, creating a problem for them to actually follow through with those desires.

USDA will release its monthly WASDE crop report at Noon Washington time today. It should be a quiet report other than seeing if USDA tries to close the large gap between CONAB’s corn and soybean production estimates, and its own estimates. Otherwise, the report is expected to confirm that global supplies of both are adequate to meet demand at this point, leaving traders to focus on weather and geopolitical risks in the days and weeks ahead, with the Black Sea garnering attention at an escalating pace in recent days and weeks.