Better inflation data spurs Russell 2000

Small caps represented in the Russell 2000 index led the equity market rally this morning. Better inflation data was the cause, following the release of what was in fact mixed Personal Consumption Expenditures (PCE) data that the Federal Reserve favors. This data confirmed what the CPI data has shown that headline inflation is trending downward, but core inflation remains the problem which Wall Street would just as soon ignore, and it largely is.

Bottom-line: Risk-on.

TODAY’S MAJOR NEWS

Core inflation and employment cost gains slowing, but still high

Core PCE price inflation, the Fed’s favored inflation measure, was up 4.1% year-on-year in June. This came in very close to the Cleveland Fed’s very timely ‘nowcasting’ tool to forecast inflation. The bad news is that the Cleveland Fed’s nowcasting forecast calls for both headline inflation and core inflation to rise again in the July data. Wall Street isn’t really focused on that, or the rate hike which would the Fed has signaled if inflation does tick up.

• The Personal Consumption Expenditures (PCE) price index was up 3.0% year-on-year in June, as forecast, down from 3.8% last month
• The core PCE price index, excluding the more volatile food and energy sectors, the Fed’s favored inflation measure, was up 4.1% year-on-year in June, pretty much as expected, and down from 4.6% year-on-year last month. Note that this is double the Fed’s 2% inflation target
• The PCE price index rose 0.2% month-on-month, as expected, up from 0.1% last month
• The core PCE price index rose 0.2% month-on-month in June, as expected, down from 0.3% last month
• The employment cost index rose 1.0% quarter-on-quarter in the second quarter, down from 1.2% in the first quarter
• The employment cost index was up 4.5% year-on-year in the second quarter, down from 4.8% in the first quarter
• Personal income rose 0.3% month-on-month in June, down from an expected 0.4%, but the May reading was revised upward a tick to 0.5%
• Personal consumption expenditures rose 0.5% month-on-month in June, ahead of an expected 0.4%, and up from an upwardly revised 0.2% last month

Europe opens Ukrainian grain lanes could alleviate supply issues

The European Union’s Agriculture Commissioner stated this week that Europe is committed to creating “solidarity lanes” for moving Ukraine grain west across Europe to export channels. Such initiatives should help to alleviate grain supply issues now the Black sea ports option has been effectively closed.

The Ag commissioner is from Poland, where he has spoken for protecting farmers from the adverse effects of dumping Ukraine grain on European markets. Yet, Europe is also committed to not allowing Ukraine’s agriculture to be shut down. Creating these solidary lanes would cost money to subsidize freight, and the commissioner stated a commitment to such. However, it’s also been reported this week that the money isn’t currently there to subsidize Ukraine land exports.

Look for Europe to “find a way” to help Ukraine, while also helping Eastern Europe farmers with subsidies as well. It’s the cost of making sure that Putin doesn’t win the war in Ukraine. They will do what they have to do, albeit at a significant cost.

TODAY’S MAJOR MARKETS

Equity markets

• We’re in yo-yo territory for equity markets, with better inflation data prompting this morning’s rally, with off, with the Nasdaq, Russell 2000, and S&P 500 up by 1.9%, 1.3% and 1.0% respectively
• Global markets were mixed, with the DAX up 1.4%, the FTSE 100 flat, and the Nikkei 225 down 0.4%
• The VIX, Wall Street’s fear index, fell back to 13.7

Currencies and Bonds

• The dollar index fell 0.2% against a basket of currencies, at 101.6
• Yen, Sterling, and Euro dollar cross rates were up by 1.1%, 0.5% and 0.4% respectively
• Bonds stabilized after yesterday’s sell off, with yields on 2- and 10-year Treasuries falling back o 4.91% and 3.97% respectively

Commodities

• Crude oil prices rallied again, up 0.5%, breaching the eighty mark to $80.5 per barrel
• Gold rose 0.7% to $1,999 per ounce, while silver rose 0.4% at $24.5 per ounce
• Grain and oilseed markets were mostly lower on profit-taking

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com