Latest market-sensitive news and views - Sept. 25
Russia Halts Diesel Exports Amid Winter Concerns and Energy Weaponization Concerns
11th largest daily U.S. corn sale | House faces looming gov't shutdown
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— Equities today: Asian and European stocks were mixed to weaker overnight. U.S. opened around 70 points lower. In Asia, Japan +0.9%. Hong Kong -1.8%. China -0.5%. India flat. In Europe, at midday, London -0.6%. Paris -0.6%. Frankfurt -0.7%.
U.S. equities for the week: All three major indices registered steep declines for the week in the wake of the Fed warning that an additional rate hike was expected, and the U.S. central bank indicated it may have to keep rates higher longer. The Down lost 1.9%, the Nasdaq fell 3.6% and the S&P 500 was 2.9% lower.
The three major indices ended Friday lower after sinking into negative territory late in the session. The Dow ended down 106.58 points, 0.31%, at 33,963.84. The Nasdaq lost 12.18 points, 0.09%, at 13,211.81. The S&P 500 fell 9.94 points, 0.23%, at 4,320.06.
Entering the last trading week of the month, the three major U.S. indexes have all declined. The Dow has dipped 2.2%, the S&P 500 has fallen 4.2% and the Nasdaq Composite has dropped 5.9%.
The yield on the 10-year Treasury note climbed 12 basis points on the week to 4.44%, slipping a bit on Friday after surging Thursday to its highest level since October 2007, as the Fed projected interest rates would remain higher for longer.
Crude oil futures: WTI traded up $0.40 per barrel (+0.5%) to close at $90.03 per barrel on Friday of last week down -$0.74 per barrel week-over-week. Brent traded down $0.03 per barrel (-0.25%) on Friday of last week, to close at $93.27 per barrel, down $0.66 per barrel week-over-week.
— Quotes of note:
— Malanga: Potential troubles loom for economy and markets: Fiscal impasse, auto strike, and rising energy prices. Dr. Vince Malanga, president of LaSalle Economics, says the near-term outlook for the economy and financial markets is clouded by three key issues. Firstly, there are unresolved fiscal issues in Congress as the fiscal year-end approaches, leading to acrimony. A budget impasse and the rising likelihood of a government shutdown are looming, although a continuing resolution extending spending bills beyond the fiscal year end remains the most likely outcome, he says. However, political haggling has reduced the odds of this scenario, and the deficit is on track to reach nearly $2 trillion, approximately 7% of GDP. In the event of a real recession, he calculates interest payments on the debt could surpass the defense budget, resulting in a deficit exceeding 10% of GDP.
Secondly, while the economic impact of an automotive strike is currently minimal, it is expected to rise as manufacturers deplete inventory due to production curtailments. Although the auto industry is no longer a vital component of the U.S. economy, Malanga says an automotive strike, combined with a widening credit crunch, the resumption of student loan payments, and pressure on discretionary income from rising energy prices, could have a cumulative negative effect on the economy.
Lastly, there is growing pressure on discretionary income due to rising energy prices, particularly evident in the increase in consumer prices in August. Both domestic and Brent crude oil prices have surpassed $90 per barrel in recent weeks, with the heating season approaching. The rise in distillate prices, a key factor in transportation costs, is of particular concern, Malanga notes. While natural gas prices have remained relatively stable, a cold winter could lead to an acceleration in utility bills.
Bottom line: These challenges could potentially impact the economy quickly, Malanga concludes. The Federal Open Market Committee (FOMC) recently decided to keep its benchmark rate steady but projected one more rate increase for the year, coupled with ongoing balance sheet reduction. Looking ahead to next year, the FOMC emphasizes a policy bias of higher rates for longer. The fixed income market reacted with a bearish yield curve steepening. However, Malanga notes the Fed's forecasting track record has been less than perfect, and implementing its policy direction will depend increasingly on economic data.
— Credit card company losses surge at unprecedented rate, approaching great recession levels. Goldman Sachs reports that credit card companies are experiencing a rapid increase in losses, a phenomenon not witnessed since the Great Recession. Current losses, totaling 3.63%, have surged by 1.5 percentage points since reaching a low point in September 2021, according to the bank's findings. Furthermore, Goldman Sachs anticipates that these losses will continue to escalate, possibly reaching nearly 5%.
This concerning trend emerges at a time when U.S. credit card debt has surpassed the $1 trillion mark, underlining the potential financial strain facing both consumers and credit card issuers. The rising losses may have broader implications for the financial industry and could necessitate adjustments in lending practices and risk management strategies.
— Surge in immigration bolsters U.S. economy, easing labor shortages and inflation pressures. A significant increase in immigration is providing a welcome boost to the prospects of a soft landing for the U.S. economy. After a prolonged period of minimal foreign-born worker inflow, exacerbated by the pandemic, the U.S. is now experiencing a notable uptick in immigration. This surge is driven by several factors, including the clearance of a backlog of visa applications and the Biden administration's acceleration of work permits, the Wall Street Journal reports. The influx of foreign workers is having a positive impact on the economy by helping to alleviate labor shortages and mitigate wage and price pressures. This unexpected source of relief comes as welcome news amid ongoing concerns about inflationary pressures and supply chain disruptions, potentially contributing to a more stable economic outlook.
— Outside markets: The U.S. dollar index was firmer, with the euro and British pound both weaker against the greenback. The yield on the 10-year U.S. Treasury note was slightly higher, around 4.5%, with a mixed tone in global government bond yields. Crude oil futures were nearly unchanged, with U.S. crude around $90 per barrel and Brent around $91.90 per barrel. Gold and silver were seeing mild pressure, with gold around $1,944 per troy ounce and silver around $23.82 per troy ounce.
— Russia halts diesel exports amid winter concerns and energy weaponization speculations. Russia has imposed a ban on diesel exports, citing concerns as the Northern Hemisphere approaches winter and the diesel fuel market faces tightening conditions. Shipments of diesel from Russia have dropped to their lowest levels since May. While Moscow characterizes these export restrictions as temporary, it has not specified an end date for the ban.
This move has prompted some analysts to view it as another instance of Russia leveraging its energy resources as a strategic tool, especially in the context of the ongoing conflict in Ukraine. However, the reaction in the diesel futures market in Europe has been relatively subdued, indicating a degree of skepticism among traders about the potential severity of the impact.
The ban on diesel exports raises questions about the implications for both domestic and international energy markets as the world prepares for winter and navigates the evolving dynamics of Russia's energy policies.
Meanwhile, French President Emmanuel Macron said he'll push the country's oil industry to sell gasoline and diesel at cost as the government seeks to blunt the impact of surging prices for households without spending vast sums of public money.
— An International Energy Agency report next month is expected to show the world is on “the cusp of a historic turning point,” with demand for coal, oil and gas set to peak before 2030. Let's not get ahead of ourselves, writes Bloomberg Opinion's Javier Blas.
— USDA daily export sale of 1,661,160 metric tons of corn to Mexico. Of the total, 1,049,771 metric tons is for delivery during the 2023-24 marketing year and 611,389 metric tons is for delivery during the 2024-25 marketing year. This would be the 11th largest daily sale on record.
— India could sell more wheat to tame prices. The Indian gov't could sell more wheat on the open market to control prices that have reached their highest in nearly eight months, the country's food secretary said. The government could sell more wheat to bulk consumers, such as flour millers and biscuit makers, to stabilize prices, he said. India earlier this month reduced the limit on the amount of wheat stocks that wholesalers and large retailers are allowed to hold to 2,000 MT from 3,000 MT previously.
— Ag trade update: Iran tendered to buy 180,000 MT of corn (sourced from Brazil, Europe, Russia, Ukraine or elsewhere in the Black Sea region) and 120,000 MT of soymeal (sourced from Brazil, Argentina or India). Tunisia tendered to buy 100,000 MT of soft milling wheat and 50,000 MT of feed barley – both optional origin. Bangladesh tendered to buy 50,000 MT of optional origin milling wheat.
— Hurricane Idalia inflicted significant agricultural losses in the state of Florida, ranging from $78 mil. to $371 mil., as reported in a preliminary study by the University of Florida. The Category 3 hurricane made landfall in Florida's Big Bend region, bringing heavy rainfall, storm surges, and strong winds. This caused substantial damage to rural areas, impacting crops like peanuts and cotton, as well as poultry, cattle, and aquaculture operations.
Livestock losses alone could range from $30.9 mil. to $123.4 million. Field and row crop losses were projected to be between $30.7 mil. and $93.6 mil., while damages to greenhouse and nursery products were estimated to be between $4.7 million and $68.8 million. The most severely affected areas were identified as six northern Florida counties, including Madison, Hamilton, Lafayette, Taylor, and Dixie.
The hurricane also had a broad impact on the state's infrastructure related to agriculture, affecting irrigation systems, fence lines, and farm buildings' roofs. Idalia brought a storm surge of up to 11 feet and had sustained winds of 125 mph, causing flooding and significant damage.
CONTINUING RESOLUTION (CR) & POSSIBLE GOV'T SHUTDOWN
— House faces looming gov't shutdown as final week in session commences. As the House of Representatives enters its final week in session before the potential government shutdown on Sept. 30, several critical legislative matters are on the agenda:
Floor votes are planned from tomorrow through Friday, indicating a busy week as the House attempts to address critical funding and legislative matters before the impending deadline.
Of note: As usual on appropriations bills, the ag sector must watch for amendments, especially negative ones dealing with farm policy. Some of them are included in the pending Ag appropriations bill, including one that would gut the sugar price support program. These usually are defeated.
Bottom line: The four FY 2024 appropriations bills are DOA in the Senate, and Rep. Matt Gaetz (R-Fla.) and some other House GOP renegades insist that they won't vote for any continuing resolution to keep the government open temporarily. A wild card is an 11th hour bipartisan spending agreement that could trigger an effort to remove Kevin McCarthy (R-Calif.) as speaker. Not helping is former President Donald Trump who went on Truth Social last night to buck up the GOP: “UNLESS YOU GET EVERYTHING, SHUT IT DOWN!”
If you want to see how the White House is already shifting blame to the Republicans should there be a gov't shutdown, link to a White House memo on the topic. Also, the Democratic Senatorial Campaign Committee said it will spend at least $10,000 to promote links in Google search results to Sens. Ted Cruz (R-Texas) and Rick Scott's (R-Fla.) comments praising the House Freedom Caucus's pursuit of spending cuts and warning a shutdown would put “Social Security at risk.”
Market impact of any gov't shutdown: Most experts believe any gov't shutdown will be temporary, and its wider impact will likely be limited. According to Morgan Stanley, the last 20 government shutdowns that occurred since 1976 "appear to have had limited impact on the economy." As for bond prices, a shutdown may cause some "temporary instability.”
— U.S. announces new support package for Ukraine. Ukrainian President Volodymyr Zelensky late last week held a meeting with President Joe Biden at the White House, coinciding with the announcement of a new support package for Ukraine. The package includes $128 million in security assistance and $197 million in arms and equipment. This aid allocation comes as the Biden administration has been actively seeking additional funding for Ukraine from Congress, despite divisions among Republican lawmakers.
To date, Congress has approved approximately $113 billion in aid for Ukraine, a substantial commitment that surpasses support provided to any other individual country.
Meanwhile, the Pentagon said the training and support of Ukrainian forces will continue uninterrupted, even in the event of a potential government shutdown, which is becoming increasingly likely as Congress faces challenges in passing a spending bill in the coming days.
— Russian strikes inflict "significant damage" on Odesa; Poland aids Ukrainian grain transit amid uncertainty over Wagner group. Russian airstrikes have caused "significant damage" to the Ukrainian port city of Odesa. These attacks are part of Russia's ongoing campaign to target Ukraine's vital grain export infrastructure, exacerbating tensions in the region. Key now is how boats are going to get loaded.
Responding to the crisis, Poland has taken steps to facilitate the movement of Ukrainian grain through its territory to reach nations in urgent need. This move underscores international efforts to mitigate the impact of the conflict on global food supplies.
Of note: Ukraine's ag ministry said its grain exports during the first three weeks of September fell 51% from the same period last year to 1.57 MMT. While the Ukrainian Agriculture Ministry offered no explanation for the decline, it is clear that the end of the Black Sea Grain Initiative and Russian attacks on Ukrainian ports on the Danube River have had an impact on the country's ability to export.
Meanwhile, the Kremlin faces a quandary regarding the future of the Russian mercenary group Wagner following the death of its leader, Yevgeny Prigozhin. Many security experts express doubts about the group's viability without Prigozhin's leadership, raising significant questions about the fate of its fighters, weaponry, and operations. The situation surrounding the Wagner Group remains fluid, adding to the complexity of the ongoing conflict and its broader implications.
— Russia sidesteps G7 sanctions, set to earn billions extra from oil exports in 2023. Russia has seemingly managed to evade G7 sanctions targeting most of its oil exports, potentially resulting in an additional $15 billion or more in oil revenues for 2023. This windfall can be attributed to both higher crude oil prices and a reduced discount on Russia's own oil. A significant development in this evasion strategy is that nearly 75% of seaborne Russian crude shipments in August occurred without Western insurance, implying Russia's adeptness in bypassing the G7's imposed $60 per barrel oil price cap. The cap has become a growing enforcement concern in Western countries as Russian Urals crude has consistently traded above $60 since July. While challenges persist in Russia's oil sector, including a tight diesel supply, recent trading data suggests that more oil revenue is likely to find its way into Vladimir Putin's financial resources, potentially further fueling Russia's economic resilience amidst international sanctions.
— USDA extends deadline for discrimination financial assistance program to Jan. 13, 2024. USDA announced an extension of the deadline for the Discrimination Financial Assistance Program to Jan. 13, 2024. This extension provides additional time for eligible farmers, ranchers, and forest landowners to apply for assistance under the program, which addresses discrimination in USDA farm lending programs prior to January 2021. The program was established in accordance with Section 22007 of the Inflation Reduction Act, with a total allocation of $2.2 billion. The amount of financial assistance awarded to individuals will depend on the number of eligible applicants and the impact of the discrimination they experienced. Eligible individuals can apply online or submit paper-based forms via mail or in-person delivery to local program offices. It's important to note that applicants are not required to retain an attorney and should take precautions to protect themselves from potential scams.
Meanwhile, the deadline for requesting records from USDA's Farm Service Agency for use in applications has been extended to Friday, Nov. 3, 2023, although FSA records are not a mandatory requirement for the application process.
— China Evergrande's shares plummet amid debt issuance halt, adding to real estate woes. Shares of China Evergrande Group experienced a sharp decline of 21.8% as the company announced its inability to issue new debt, citing an ongoing investigation into one of its subsidiaries. This development deals a significant blow to the beleaguered developer's restructuring efforts.
Besides Evergrande's troubles, Country Garden also faced a setback, with its shares falling over 7%. Investors are closely monitoring the company's upcoming dollar bond coupon payment, scheduled for Wednesday.
The broader concerns surrounding the real estate sector in China had a ripple effect on the country's main stock exchanges, which declined by another 0.6%. Notably, Hong Kong's Hang Seng index plunged by 1.8%.
Adding to the unease among foreign investors was the uncertainty regarding the fate of Nomura's head of China investment banking, Charles Wang Zhonghe. Chinese authorities overseeing the firm's banking operations have reportedly instructed him not to leave the mainland, further contributing to the apprehension surrounding the Chinese financial landscape. The ban is reportedly connected to an investigation into Bao Fan, a Chinese tech dealmaker who disappeared in February. China has recently cracked down on financiers, vowing to smash “financial elitism” and “worship of wealth.”
— U.S. Ambassador to Japan accuses China of fishing in Japan's waters, Calls It ‘economic coercion'. U.S. Ambassador to Japan, Rahm Emanuel, accused Chinese fishing boats of operating in Japan's exclusive economic zone, despite China's ban on all Japanese seafood. Emanuel made this claim on social media, posting pictures of Chinese vessels fishing off Japan's coast on September 15 and using the hashtag #Fukushima. The Chinese ban on Japanese seafood is linked to concerns about water being released from the Fukushima nuclear plant.
In a speech at a Tokyo university, Emanuel characterized China's actions as "economic coercion" and questioned whether it was a public health issue if China continued fishing in those waters despite the ban. This comes in the wake of a report suggesting that President Joe Biden's aides had asked Emanuel to refrain from posting provocative messages on social media directed at Chinese President Xi Jinping. The National Security Council reportedly expressed concerns that Emanuel's comments could undermine efforts to improve relations with China, including a potential meeting between Biden and Xi in the fall. However, Emanuel's spokesperson disputed this report.
China responds. In response to Emanuel's recent comments, the Chinese foreign ministry called on him to stop supporting Japan's actions and accused the U.S. of being biased in favor of Japan.
— USTR reiterates commitment to WTO reform, focusing on dispute settlement. Katherine Tai, the U.S. Trade Representative, emphasized the United States' dedication to reforming the World Trade Organization (WTO), addressing criticism that the U.S. has been slow in updating the trade body's outdated rules. Speaking Friday (Sept. 22) at the Center for Strategic and International Studies in Washington, Tai stated that the U.S. is actively working on a comprehensive reform agenda aimed at enhancing transparency, strengthening the WTO's negotiating capabilities, and revitalizing its dispute-settlement system.
But Tai made it clear that the Biden administration is not seeking to "restore" the WTO appellate body, which serves as a kind of supreme court for trade disputes but ceased functioning in 2020 due to former President Donald Trump's blocking of new appointments. She stressed that the goal is not to revert to the previous state of affairs but to instill confidence that the system is fair and empower member nations to resolve their disputes effectively.
The paralysis of the WTO's appellate body has made it difficult for member countries to obtain trade justice amid growing global economic tensions. While countries can still file disputes at the WTO, a losing party can effectively veto WTO rulings by appealing into uncertainty.
Tai outlined four specific goals for reforming the dispute settlement system, including providing practical alternatives to litigation, limiting dispute rulings to what is necessary to resolve disputes, addressing judicial overreach, and correcting panel reports that second-guess members' legitimate national-security judgments.
Skepticism remains high among U.S. allies and adversaries who have observed the Biden administration's limited use of the system. Instead of filing dispute-settlement cases, the U.S. has engaged in bilateral negotiations with key trading partners to resolve trade disputes outside the WTO framework. Additionally, some observers note the U.S. has maintained WTO-illegal tariffs, blocked new appointments to the appellate body, and pursued domestic subsidies, raising doubts about its commitment to reforming the WTO.
Next month, the WTO will host a senior officials' meeting to discuss the 2022 pledge to restore a fully functioning dispute-settlement system by 2024. Expectations for a breakthrough remain low, particularly with the 2024 deadline coinciding with a U.S. presidential election year. Many believe the Biden administration may be reluctant to invest political capital in repairing a system perceived as failing to address China's trade abuses effectively.
— Toyota aims to triple electric vehicle production by 2025 in electrification drive. Toyota Motor is planning to significantly accelerate its electric vehicle (EV) production, aiming to triple its output in 2025 compared to its 2024 target. This move is part of Toyota's efforts to catch up with competitors such as Tesla and BYD in the EV market. The automaker informed its major parts suppliers of its plans to increase the production of Toyota and Lexus brand EVs to 600,000 units by 2025, up from the 2024 target of 190,000 units. In 2022, Toyota sold 24,000 EVs. Toyota's broader production goal for 2023 is to manufacture over 10 million vehicles, including approximately 150,000 EVs. By 2025, the company aims to produce 11 million vehicles, with EVs accounting for 5% to 6% of the total. These production figures also include original equipment manufacturer (OEM) models. An executive from a parts company estimates that Toyota's EV sales in 2025 will reach around 800,000 units, including OEM sales.
To achieve these targets, Toyota is planning to introduce new EV models, including an EV Hilux in Thailand, electric SUVs in China and the U.S. next year, and an electric Lexus ES in Japan in 2025. The company is also collaborating with Suzuki Motor and subsidiary Daihatsu Motor to develop EV versions of mini commercial vehicles.
In the U.S., dedicated battery production is set to begin in 2025, and Toyota will establish battery production lines at two Aichi plants. Toyota's battery subsidiary, Prime Planet Energy & Solutions, will also increase production capacity. Toyota plans to source batteries from various suppliers, including Chinese battery leader Contemporary Amperex Technology (CATL), China's top EV maker BYD, and is in negotiations with South Korea's LG Energy Solution.
Toyota intends to introduce a next-generation EV platform, starting with Lexus models in 2026. This platform will incorporate advanced manufacturing techniques, such as gigacasting equipment for molding aluminum chassis parts.
Diversification. While Toyota aims to sell 3.5 million EVs in 2030, including 1.7 million using the new platform, the company is maintaining a diversified strategy that values various power sources, including gasoline and hybrid vehicles. Currently, Toyota's EVs face challenges in terms of profitability and are lagging behind competitors like Tesla and BYD.
— Interior Dept. extends deadline for Gulf of Mexico drilling rights bids in response to court ruling. The U.S. Interior Department announced an extension of the deadline for oil companies to submit bids for drilling rights in the Gulf of Mexico. This decision comes in the wake of a court ruling that compelled the agency to expand the acreage available in a lease sale scheduled for Sept. 27. The bid submission deadline has been moved to 3 p.m. CST on Sept. 26, allowing for more time for interested parties to participate. Notably, this extension means that previously withdrawn acreage will be reintroduced into the sale, and lease stipulations designed to address potential impacts on Rice's whale will be removed from any leases sold during the auction.
While these changes are significant, environmental organizations and the Interior Department have appealed the court order. The Interior Dept. is seeking a partial stay pending appeal, with the aim of extending the sale deadline beyond Sept. 30, adding an additional layer of complexity to the ongoing legal and environmental considerations surrounding offshore drilling in the Gulf of Mexico.
— Biden administration aims to exclude medical bills from credit reports to alleviate debt burden. The Biden administration late last week introduced new proposals aimed at removing medical bills from individuals' credit reports. This initiative is driven by the goal of reducing the burden of medical debt on Americans, particularly at a time when many are grappling with the rising cost of living and historic levels of inflation. Medical debt has been a significant factor in lowering people's credit scores, which, in turn, affects their ability to engage in various financial activities, such as buying a home, securing a mortgage, or establishing a small business. Vice President Kamala Harris emphasized the negative impact of medical debt on credit scores during a call with reporters, announcing the new initiative.
If this proposed rule is finalized, consumer credit companies would be prohibited from including medical debt and collection information on credit reports that creditors use to make underwriting decisions. This move aims to provide relief to individuals burdened by medical bills and promote greater financial inclusivity.
— U.S. gov't resumes free Covid-19 test distribution amid rising hospitalizations. Starting today, U.S. households can order up to four free Covid-19 tests from the government through Covidtests.gov. This relaunched program aims to provide accessible home tests to Americans, addressing the growing concern of rising Covid-19 hospitalizations across the nation.
POLITICS & ELECTIONS
— CFTC rejects Kalshi Inc.'s proposal to enable election betting, citing violation of state laws. The Commodity Futures Trading Commission (CFTC), the leading derivatives regulator, has denied Kalshi Inc.'s request to introduce betting options on congressional elections. Kalshi's proposal aimed to permit hedge funds and other Wall Street entities to place bets of up to $100 million on the political party that would control the House or Senate. The CFTC's decision was based on the assertion that the proposed betting contracts would violate state laws, rendering them "contrary to the public interest."
Bottom line: This rejection underscores the regulatory hurdles associated with introducing financial instruments related to political events and elections in the United States.
— Donald Trump gains ground with 59% support among Republican primary voters, NBC News poll reveals. A new NBC News national poll revealed that 59% of Republican primary voters consider former President Donald Trump their top choice in the crowded GOP presidential primary. This marks a notable increase from June, when 51% of GOP voters favored Trump as their first choice, highlighting his growing support within the party. Following Trump, Florida Governor Ron DeSantis secured the support of 16% of primary voters as their first choice, a decrease from the 22% support he received in June. Notably, former U.N. Ambassador Nikki Haley witnessed a rise in her support, with 7% of GOP voters selecting her as their first choice in September, compared to 4% in June. These shifting preferences among Republican primary voters signal the evolving landscape of the upcoming presidential race within the party.
Meanwhile, the latest NBC News poll includes President Biden's low approval rating (at 41%) and three-quarters of voters concerned about the president's age and mental fitness, as well as GOP presidential frontrunner Donald Trump's general unpopularity (35% positive, 54% negative rating) and nearly two-thirds concerned about his multiple criminal trials.
Of note: Just 38% of young voters ages 18 to 34 say they have high interest in the 2024 election, registering either a “9” or “10” in interest on a 10-point scale. That compares with 68% of all voters in the poll expressing high interest, as well as 87% of seniors 65 and older and 79% of voters ages 50 to 64. And it's not just younger voters lagging in election interest. Black and Latino voters are at 53% and 51%, respectively, while white voters are at 73%. By party, 75% of Republicans say they have high interest in the 2024 election, versus 68% of Democrats. Observers note it is still early in the cycle.