Suderman 051023

Inflation data mixed for Indices, markets remain calm

Today's news was generally negative, with mixed inflation data, a continuing US debt ceiling negotiations standoff, and data showing that many regional banks are tightening credit availability. Nonetheless, equity indices erased early losses to push modestly higher following the release of this morning’s consumer price index data. Bulls point to the decline in headline inflation, down to a 4.9% annual rate, while bears would highlight less progress on reducing sticky core inflation after more volatile food and energy prices are excluded at a 5.5% annual rate. While not enough to prompt the Fed to raise rates, the data also suggest that rate cuts might not be on its agenda anytime soon.

Wall Street welcomes moderating Inflation, but how good was it?

• Headline April Consumer Price Inflation (CPI) rose 4.9% year-on-year in April, down from 5.0% the previous month, and down from analyst expectations of 5.0%.
• CPI rose 0.4% month-on-month, matching analyst expectations, and up from 0.1% the previous month
• Core CPI, excluding more volatile food and energy sectors, was up 5.5% year-on-year in April, matching analyst expectations, down from 5.6% in March
• Core CPI rose 0.4% month-on-month, matching analyst expectations and the previous month
• Core inflation ex energy is still stubbornly high. Fuel oil and natural gas prices fell 4.5% and 4.9% month-on-month respectively in April, providing the bulk of the downward pressure in April; these items were countered by a 3% rise in gasoline prices
• April also saw a resurgence in used car prices of 4.4% as demand for new cars backed off
• Services less energy and shelter both rose 0.4% month-on-month, while medical care commodities rose 0.5%, and commodities less food and energy rose 0.6%

Markets unchanged on inflation data

• At the time of writing, the broad S&P 500, tech heavy NASDAQ and Russell 2000 indices recovered from early declines to be up by 0.1%, 0.8% and 0.4%
• The KBW Regional Bank Index fell 1.1% morning, continuing their downward track after a few bullish reversals
• The VIX, Wall Street’s fear index, fell back to 17.1, reflecting a sanguine outlook
• The dollar index was unchanged at 101.3, with and Dollar/Sterling and Euro/Dollar also flat
• Yields on 2- and 10-year Treasuries fell on the inflation news to 3.95% and 3.45%, respectively

Commodities weak, Gold holds above 2K mark

• Gold prices maintained the 2K level, but fell 0.5% to $2,033 per ounce
• Crude oil prices fell 0.8% to $73.1 per barrel
• Grain and oilseed prices were also modestly lower this morning

Strategic Petroleum Reserve being topped up next year

• The Energy Information Administration said intends to start replenishing the Strategic Petroleum Reserve early next year, while giving no volume targets, as it released its short-term energy outlook for May yesterday
• The report said replenishing is delayed to complete maintenance work on storage caverns
• Purchasing oil for the SPR is expected to be inflationary, pushing prices that consumers pay for gasoline at the pump higher – so delays are welcome from an inflation standpoint
• Reserves are currently at roughly four-decade lows, leaving the US vulnerable should a shortage develop – either naturally or due to geopolitical risks
• The EIA estimated that US crude oil production is proving hard to expand, being 12.58 million barrels per day (mbpd) this month, with this year’s and next year’s average being 12.53 mbpd and 12.69 mbpd respectively
• The report initially provided support for the crude oil market, but movements in the Oil Futures market implied little risk of significant purchases for the SPR next year

Ukraine Grain deal talks start, China hosts Central Asian summit next week

• Formal negotiations finally started in Istanbul today to extend the Ukraine grain initiative, with all parties present
• Russia restarted inspections of grain ships yesterday, but only specifically designated ships leaving Ukraine
• On a related note, China will host the first China-Central Asia Summit next week, involving countries key to its Belt and Road Initiative – primarily in central Asia and former members of the Soviet Union
• China sees its investment in these countries as critical to its economic and military security at a time when the US in strengthening ties in the region
• Japan, the Philippines, and South Korea countries are moving away from China and towards stronger cooperation with the US, while at the same time strengthening their military presence in the region

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com