Latest market-sensitive news and views - Sept. 20
Crude Awakening: Rising Oil Prices Complicate Fed's Decisions Later This Year
Today's Digital Newspaper
CONTINUING RESOLUTION (CR) and POSSIBLE GOV'T SHUTDOWN
RUSSIA & UKRAINE
ENERGY & CLIMATE CHANGE
OTHER ITEMS OF NOTE
Equities today: Asian and European stocks were mixed overnight. U.S. Dow opened around 90 points higher. In Asia, Japan -0.7%. Hong Kong -0.6%. China -0.5%. India -1.2%. In Europe, at midday, London +0.8%. Paris +0.4%. Frankfurt +0.6%.
U.S. equities yesterday: All three major indices finished with modest declines ahead of Wednesday's Fed meeting conclusion. The Dow was down 106.57 points, 0.31%, at 34,517.73. The Nasdaq declined 32.05 points, 0.23%, at 13,678.19. The S&P 500 lost 9.58 points, 0.22%, at 4,443.95.
Brent crude futures, the international energy benchmark, are on track to rise by 26% this quarter having climbed to about $95 a barrel. On Tuesday, they added 0.4%, putting prices on track for a four-day streak of gains and rises in 13 of the past 16 trading days. West Texas Intermediate futures, the U.S. benchmark, have jumped 29% this quarter to just over $91 a barrel.
Gasoline prices have risen to a national average of $3.88 a gallon in the U.S. from $3.68 one year ago, AAA said. Gas costs jumped 11% from July to August, driving more than half of overall inflation for the month.
Meanwhile, the price of diesel, which often fuels trucks and factories, has soared even faster, especially in Europe. In the U.S., the average price is $4.58. Data from Britain this morning showed inflation fell faster than expected last month, but rising fuel prices were an outlier to that trend.
Quotes of note:
— The Sevens Report, looking at today's FOMC decision, says there are three areas where the Fed could provide a hawkish or dovish surprise: Rate hikes, forward guidance and the "dots." Of the three, "the most likely to surprise markets are the dots, specifically the 2024 dots. How each of these variables work out will determine if the FOMC meets expectations, is hawkish or is dovish."
— U.K.'s annual inflation rate unexpectedly dips to 6.7% in August, contrary to predictions of 7% increase. In a surprising turn of events, the annual inflation rate in the United Kingdom eased to 6.7% for the month of August, a slight decrease from July's 6.8%. Economists had previously anticipated a rise to 7%. Additionally, the core inflation rate, which excludes the prices of energy, food, alcohol, and tobacco, also experienced a decline. Chancellor Jeremy Hunt hailed the figures as evidence that the government's inflation response was effectively achieving its goals, describing it as "plain and simple."
— Amazon plans to hire 250,000 workers and boost employee pay ahead of holiday season. In preparation for the upcoming holiday season, Amazon announced its intention to hire 250,000 workers for a range of positions, including full-time, part-time, and seasonal roles in fulfillment centers and transportation operations across the United States. Additionally, the e-commerce giant is committing $1.3 billion this year to increase the wages of customer fulfillment and transportation employees, marking a substantial increase of more than 50% over the past five years.
Despite facing macroeconomic challenges such as inflation, the resumption of student loan repayments, and higher gas prices, U.S. retail sales are expected to remain resilient during the holiday season. Deloitte anticipates growth in holiday sales, albeit at a slower rate compared to the previous year, with estimates ranging from 3.5% to 4.6%, compared to last year's 7.6% growth.
Plans in the retail sector aren't nearly as cheerful. Big-box merchant Target said it plans to add 100,000 seasonal workers this year, in line with last year's hiring, including in-store and supply-chain staffers. Macy's is trimming its seasonal hiring 7% compared to last year, to 38,000 workers. The U.S. Postal Service said it is bringing on just 10,000 workers after earlier hiring initiatives.
— Outside markets: The U.S. dollar index was weaker. with the yen and euro both firmer against the U.S. currency. The yield on the 10-year U.S. Treasury note was slightly weaker, trading around 4.34%, with a mixed tone in global government bond yields. Crude oil futures were under pressure ahead of U.S. gov't inventory data, with U.S. crude around $90.40 per barrel and Brent around $93.60 per barrel. Gold and silver were slightly, with gold around $1,954 per troy ounce and silver around $23.59 per troy ounce.
— U.S. oil stockpiles fell by 5.25 million barrels last week, the API is said to have reported. That would bring holdings to the lowest in more than nine months if confirmed by the EIA today. Meanwhile, Goldman Sachs today raised its price target for Brent crude to $100, joining a growing club that predicts triple-digit oil heading into the winter.
— U.S. home insurance costs may be headed even higher. Nonprofit First Street Foundation estimates that 39 million homes are insured at artificially suppressed prices compared with the risk they face from hurricanes, wildfires and floods.
— United Auto Workers' threat of prolonged strikes could trigger 10% surge in car prices. Automobile prices may see a significant surge of up to 10% or more as the United Auto Workers (UAW) union threatens further walkouts, according to experts. This ongoing labor dispute is also posing substantial financial risks to major automakers, with GM and Ford facing potential losses of as much as $125 million per week. Rob Handfield, a business professor at North Carolina State University, predicts that if the strike persists for a month or longer, it could result in roughly a 10% increase in vehicle prices. The extent of price hikes would vary depending on the specific make and model of vehicles. Handfield told the New York Post that if the strike continues for an extended period, it could impact the inventory levels of car dealerships. As dealerships begin to have fewer cars available, they may raise prices to compensate for the reduced supply, potentially leading to price increases of up to 10%.
— Egypt turns to France and Bulgaria for wheat supply after Moscow objects to pricing. Egypt has chosen to diversify its wheat sources, opting for France and Bulgaria, as Moscow has disrupted the supply of Russian grain, according to Bloomberg. The objection from Moscow stems from pricing concerns related to a substantial wheat deal. This marks the second instance in recent months where Egypt's state-run procurement of Russian wheat has faced complications, as Moscow authorities attempt to enforce an unofficial price floor.
Background. In early September, Egypt's General Authority for Supply Commodities had initially agreed to purchase 480,000 tons of Russian wheat through direct negotiations, as confirmed by Supply Minister Ali El-Mosilhy. This deal was secured at a price of $270 per ton, including freight, which was below the unofficial price floor that Russian officials were attempting to establish at that time. Shortly thereafter, Egypt announced that crop trader Solaris would have the option to supply grain from any source.
Russia's grain ports are grappling with excess supply following two consecutive bumper harvests, establishing the country as the leading shipper and price-setter in the global market. Nonetheless, the surplus in supply has led to local price fluctuations, prompting officials to enforce a price floor to stabilize the market, although the application of this limit has been inconsistent.
CONTINUING RESOLUTION (CR) & POSSIBLE GOV'T SHUTDOWN
— House GOP leadership fails to advance Pentagon spending bill due to five renegade Republicans. It was another setback Tuesday for House Republican leadership, this time for their effort to advance the Pentagon spending bill as five renegade GOP lawmakers voted against the rule, leading to its defeat. This incident reflects the ongoing challenges faced by House Republicans in finding consensus on funding the federal government, with the looming deadline of Sept. 30 for agencies to run out of money.
Earlier Tuesday, House Republicans had abandoned a procedural vote aimed at funding the gov't for 30 days. Speaker Kevin McCarthy (R-Calif.) urged party members to convene and devise a plan that could gain approval across the entire Republican caucus.
The five renegade Republican representatives voting against the rule: Ken Buck (Colorado), Andy Biggs (Arizona), Ralph Norman (South Carolina), Dan Bishop (North Carolina), and Matt Rosendale (Montana). (Note: There are additional renegade Republicans such as Matt Gaetz (R-Fla.) who voted for the Pentagon measure.)
Efforts to coax Norman to change his vote went nowhere because he wants a commitment from McCarthy regarding a topline spending figure for fiscal year (FY) 2024, advocating for discretionary spending to be set at $1.47 trillion. Norman is a member of the important Rules Committee.
Rep. Mike Garcia (R-Calif.) railed against the five GOP renegades, accusing them by name of aiding the Chinese Communist Party and President Xi Jinping. Rep. Mike Simpson (R-Idaho), a top appropriator, complained that "we're being dragged around by five people, when 200 of us are in agreement."
Now what? There are 11 days until a shutdown. And the House is out Monday for Yom Kippur. Some conjecture that GOP leadership will load up a stopgap spending bill with key GOP priorities, pass it, and hope for negotiations with Senate Democrats to keep the government funded or amend the bill and return it to the House. But even if that is the approach taken, it's still not clear if McCarthy can get enough GOP votes as some of the Republican renegades may vote no on anything offered.
Bottom line: Some say the question is not if a gov't shutdown occurs, it's how long it will last and what it will take to rectify any such shutdown. It's not even winter yet but the House GOP appears frozen at this juncture, unable to move on any option.
— White House warns of potential consequences as gov't shutdown looms. The White House publicly addressed the potential consequences of a government shutdown, emphasizing the risks of a lapse in funding next month as infighting among House Republicans over spending raises the likelihood of such an event. The government's partial shutdown, if it occurs, could lead to disruptions at airports, delayed food-safety inspections, halted infrastructure projects, and military personnel working without pay.
White House officials privately express confidence that the public would hold Republicans accountable for any shutdown and plan to increase warnings about its consequences. Senate Minority Leader Mitch McConnell (R-Ky.) has also voiced concerns about the political repercussions of a shutdown, citing its negative impact on Republicans in the past.
The severity of the effects of a potential shutdown would depend on its duration, with a brief shutdown likely resulting in limited fallout. However, an extended shutdown could lead to significant disruptions in gov't services and leave federal employees working without pay. The White House highlighted various consequences, including military and law enforcement personnel working without pay, potential delays in disaster-relief funding, and increased travel disruptions due to a shortage of air-traffic controllers and TSA officers.
The White House also pointed to potential delays in critical areas such as medical research, workplace and food-safety inspections, environmental protection efforts, and small business loans. Government agencies typically follow their own contingency plans in the event of a shutdown, determining which employees are essential and outlining the extent to which operations will continue.
— Polish president promises to safeguard grain market amid rising Ukraine tensions. Polish President Andrzej Duda pledged to protect Poland's grain market from an influx of Ukrainian grain, emphasizing the need for control over such imports. "We cannot allow that Ukrainian grain is sold on the Polish market without any control," Duda said in a Bloomberg Television interview in New York on Tuesday. Duda expressed concerns about the impact on Polish citizens and urged Ukraine to refrain from public attacks amid a dispute that has strained the close ties between the two countries in their united stance against Russia's invasion of Ukraine.
Tensions have arisen recently, with Ukraine criticizing Poland's decision to impose a ban on grain imports in response to farmer protests over declining grain prices. Ukraine filed a complaint with the World Trade Organization regarding the restrictions.
Ukraine has proposed a mechanism to control exports of key crops to the European Union, seeking approval from the bloc for the initiative. If accepted, Ukrainian exporters will receive licenses to ship specified crops while ensuring volumes remain within agreed limits.
Observers say Poland's closure of its grain market to Ukrainian imports is driven by political considerations, particularly the ruling Law & Justice party's desire to maintain support from its rural voter base. The party is facing an election on Oct. 15 and is cautious not to alienate segments of its constituency. Poland has been a significant source of military aid for Ukraine and has taken in approximately two million refugees from Russia's invasion.
— Ukraine charts new grain export route amid Russian naval threat and trade disputes. In a bold move to secure export routes for its critical grain industry, Ukraine has taken two significant steps, sending a ship laden with wheat along a new Black Sea route in defiance of Russian naval aggression and challenging one of its key allies, Poland, over its stance on Ukrainian imports, the New York Times reports.
The ship in question, the Resilient Africa, carrying 3,000 metric tons of wheat, successfully crossed into Romanian waters on Tuesday evening after departing from the Ukrainian port of Chornomorsk more than 12 hours earlier. This move underscores the growing importance of establishing a new sea route as Ukraine faces renewed disputes with its grain-producing European Union neighbors regarding overland exports.
However, despite the Resilient Africa's apparent safe passage, experts caution that uncertainty remains over Ukraine's ability to rebuild its vital grain industry, which has been burdened by 19 months of conflict.
The vessel, sailing under the flag of Palau, marks the first grain ship to leave a Ukrainian Black Sea port since Moscow terminated a year-long deal that allowed Ukraine to export grain directly through waters dominated by Russia's Black Sea fleet to Turkey and the Bosporus.
Under the new route proposed by the Ukrainian government, ships will travel along the coast before entering Romanian and Bulgarian waters—both NATO member states. Ukraine's Infrastructure Minister, Oleksandr Kubrakov, described this corridor as "established by the Ukrainian Navy."
Nevertheless, the risks associated with this new export route are substantial. In July, Moscow issued a warning, stating that it would consider any commercial vessel approaching a Ukrainian port as a potential carrier of military cargo. In the following month, the Russian Navy fired warning shots at a cargo ship, boarding it at gunpoint for inspection. Since July, Russia has also targeted the Ukrainian port of Odesa and the country's Danube River ports, specifically aiming at grain facilities.
Moreover, the Black Sea itself has become a theater of conflict between Ukraine and Russia, with both sides launching attacks on military targets across vast stretches of water. The success of Ukraine's new export route may depend on the willingness of commercial shipping companies to risk their vessels in this volatile environment.
Besides these challenges, Ukraine has faced resistance from neighboring countries, including Poland, Hungary, and Slovakia, regarding overland grain exports. These nations argue that Ukrainian crops arriving by road and rail undercut their domestic producers. In response to their opposition, Ukraine filed a complaint with the World Trade Organization against the three countries.
The tensions have complicated Ukraine's relationship with Poland, one of its staunchest supporters. Poland's conservative governing party, Law and Justice, which leads in the polls ahead of upcoming elections, is seeking to balance support for Ukraine with protecting its farmers from competition with cheap Ukrainian grain.
Despite these obstacles, Ukraine remains committed to resolving the issue and has presented an action plan to control the export of specific agricultural products. In the face of Russian pressure on its export routes, Ukraine managed to export approximately five million tons of grain in July and August, similar to levels when the grain deal was in effect.
However, experts warn that Russia's actions have inflicted longer-term damage on Ukraine's agricultural sector. Fortunately, the dire consequences predicted by some, such as exacerbating a hunger crisis in various countries, have not fully materialized, thanks to the stability of global wheat supplies and prices. Russian wheat exports across the Black Sea have contributed to this stability, despite the initial spike in wheat prices at the start of the invasion.
— Russia raises grain export forecast. Russia's ag minister says he expects the country to export 60 MMT of grain this year. Wheat will account for the bulk of that total, though he didn't give a specific wheat export figure. He noted the country has harvested 123 MMT of grain out of an expected 130 MMT.
— Ukrainian President Volodymyr Zelenskyy delivered a powerful speech at the U.N. General Assembly, his first in-person address since the 2022 Russian invasion of Ukraine. Zelenskyy called for global unity against Russian aggression and received enthusiastic applause when he began. In his 15-minute speech, he accused Russian leaders of engaging in acts of terrorism and genocide, with a particular emphasis on the removal of Ukrainian children from their country. He accused Russia of weaponizing food and energy prices against the entire world.
Zelenskyy appeared on CNN and made a plea to former President Donald Trump to share any potential peace plans he claims to have. Trump, who is the leading contender for the 2024 Republican presidential nomination, has asserted that he could negotiate a deal between Zelenskyy and Russian President Vladimir Putin to bring an end to the conflict in Ukraine within 24 hours.
— China leaves benchmark lending rates unchanged. China kept benchmark lending rates unchanged, as expected. The one-year loan prime rate (LPR) was kept at 3.45%, while the five-year LPR was unchanged at 4.20%. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.
— China appeals WTO decision rejecting tariffs on $2.4 billion of U.S. products. China lodged an appeal with the World Trade Organization (WTO) against a recent decision that rejected the country's tariffs on $2.4 billion worth of U.S. products. The Ministry of Commerce in China stated that it believes the WTO panel's ruling contained legal errors and that the appeal is aimed at safeguarding its rights and interests. The WTO panel had ruled in favor of the U.S. last month, finding that China violated its trade commitments when it imposed these tariffs in response to former President Donald Trump's steel and aluminum duties. The panel agreed with the U.S.' argument that China's tariffs breached its most-favored-nation status and other trade concessions made when it joined the WTO.
China contends that its tariffs were implemented as a response to unilateral and protectionist measures taken by the U.S. during the early stages of Trump's trade war, which included imposing 25% tariffs on global steel imports and 10% tariffs on aluminum imports.
Of note: A Beijing appeal effectively acts as a veto since the WTO appellate body has not been operational since 2019.
ENERGY & CLIMATE CHANGE
— EPA urged to strengthen oversight of RFS program following auditor's report. The Environmental Protection Agency (EPA) has been called upon to enhance its oversight of the Renewable Fuel Standard (RFS) program to prevent fraudulent activities and circumvention of program rules, according to a report from the EPA Office of Inspector General (OIG). The report highlighted vulnerabilities within the program, including the creation of 339 million counterfeit Renewable Identification Numbers (RINs) since the inception of the RFS in 2005, with a total estimated value of approximately $87 million.
The OIG identified several weaknesses in the RFS program, including the allowance for companies to submit their transactions up to 30 days after they occur, the generation of surplus ID numbers by companies, insufficient verification of renewable fuel transactions among firms, and a lack of assurance regarding the independence of human auditors. The OIG stressed that until these issues are effectively addressed, the EPA cannot reasonably ensure that the RFS program is achieving its objectives of reducing greenhouse gas emissions, expanding the renewable fuels sector, and decreasing dependence on imported oil.
The OIG established four dummy companies capable of purchasing, selling, and transferring RINs, underscoring the urgency of addressing the identified weaknesses. The EPA has acknowledged and agreed with all of the OIG's findings.
— Yellen advocates climate guidelines for banks at U.N. General Assembly. Treasury Secretary Janet Yellen is championing guidelines for banks that make commitments to achieve net-zero emissions, emphasizing the urgency of addressing climate change in the wake of recent devastating natural disasters. Yellen's initiative includes nine principles aimed at promoting best practices for lenders pursuing net-zero goals, such as employing clear metrics, ensuring transparency in progress reporting, and providing financing to support clients in transitioning to clean energy.
Highlighting economic losses of nearly $200 billion due to natural disasters this year, Yellen stressed the immediate need for action. She also announced pledges totaling $340 million from nonprofits, including the Bezos Earth Fund and Bloomberg Philanthropies, to facilitate the implementation of these guidelines. Additionally, Yellen held discussions with top financial executives, including Larry Fink of BlackRock, to address these climate initiatives.
Yellen's commitment to climate action dates back to the 1990s when she began studying the economic impacts of climate change during her tenure as the chair of Bill Clinton's Council of Economic Advisers. While some praise her dedication, critics argue that her actions have not matched her rhetoric, despite declaring climate change an "existential threat" two years ago during her confirmation hearing. Joe Thwaites of the Natural Resources Defense Council emphasized the need for concrete actions to align with Yellen's climate declarations.
In related climate news, the U.N. is hosting the Climate Ambition Summit, featuring speakers exclusively from nations actively working to limit fossil fuel production, as opposed to solely focusing on reducing greenhouse gas emissions. Notably, Ursula von der Leyen, President of the European Commission, will speak at the summit, while John Kerry, the U.S. climate envoy, is not scheduled to participate.
OTHER ITEMS OF NOTE
— European Commission proposes 10-year renewal of glyphosate approval, awaits EU member country votes. The European Commission put forward a proposal to extend the approval for glyphosate for a period of 10 years. This recommendation from the Commission will undergo a voting process involving the 27 European Union (EU) member countries. To be adopted, the measure requires the support of at least 15 members, constituting a qualified majority representing a minimum of 65% of the EU's population.
In July, the Commission indicated its endorsement for glyphosate's approval and reauthorization for use within the EU, based on a risk assessment conducted by the European Food Safety Authority. The assessment did not identify any critical areas of concern associated with glyphosate use. The forthcoming recommendation is slated for discussion among member countries on Friday, with the final vote scheduled for Oct. 13.
— Calendar of events today include:
Wednesday, Sept. 20