The CPI was released on 07/11/19 and the monthly number came in the highest since March of 2006, with an increase of 0.3%. Interestingly enough, the strong job number released last Friday, already caused the 30 year bond to post a large outside day down. Now the CPI number just helped to provide positive emphasis. This will put in doubt that possibility of a drop in the Fed fund rate at the end of the month, but the stock market rallying to new highs, doesn’t seem to believe that inflation is lurking.
We would point out three points that could develop further the inflation idea.
- Wage inflation building as full employment leaves little room for more job creation and more chance of rising wages.
- Weather issues causing more disruption and production losses in agricultural prices. Today the USDA released its latest global supply/demand and in it they continue to confirm a potential loss of 45 MMT of corn and soybean production in the US due to reduced and slow planting of crops. (heaviest historical rain over the last 12 months in the US), along with a drop of 9 MMT of wheat production due to weather issues, in EU, Russia, Australia, Canada, and Turkey.
- A possible flare up or even war with Iran, which would cause oil prices to jump.
None of the above is farfetched.
If there is an inflation story that begins to build, then index funds will begin to show interest and they can throw some size around. Grains are a large percentage of total index fund activity and sugar is one of the most liquid commodities behind corn. A big injection of capital can have a positive impact on price. Back in 2006, and 2007, traders got used to seeing waves of new capital coming in at the start of the month. Been sometime since we have seen something significant. Are we close to seeing this again?