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In Today's Digital Newspaper
President Vladimir Putin spoke angrily of those who want “Russians to fight each other,” but his former ally, Yevgeny Prigozhin, said the mutiny he led was not a coup attempt.
China took a further step to slow the slide in the yuan, setting its daily reference rate for the managed currency at a stronger-than-expected level for a second day.
Treasury Secretary Janet Yellen will visit Beijing in early July for the first high-level economic talks with her new counterpart He Lifeng, according to reports. Meanwhile the Biden administration expects to ready an executive order as soon as next month that would regulate and potentially bar some U.S. investments in China.
Why would the Fed keep hiking rates if inflation is coming down? The Sevens Report offers a possible answer. See Markets section.
European Central Bank (ECB) President Christine Lagarde indicated that the central bank will likely be unable to declare an end to its cycle of interest-rate increases soon.
Central bankers have gathered in Sintra, Portugal, this week to address global economic concerns, focusing primarily on the ongoing battle against inflation. We have some details below.
Advocates of student debt relief want President Joe Biden to use a 1965 law to cancel student debt if the Supreme Court overturns his loan forgiveness program. Astra Taylor, a co-founder of the Debt Collective points to provisions in the Higher Education Act from almost six decades ago that Biden could use instead to forgive student debt.
President Biden announced details of a $42 billion federal investment in expanding Internet access for Americans, kicking off a new leg of a tour promoting the benefits of a 2021 bipartisan infrastructure package. "We're going to be able to connect every person in America to reliable high-speed Internet by 2030," he declared. The money will be released in stages and should provide additional incentives to big broadband providers.
Global trade decline is negatively impacting Asian exports, leading to lower consumer inflation in Western countries because of decreased producer prices in Asia.
Speaking of trade, former U.S. Trade Representative Robert Lighthizer is out with his book, No Trade is Free. We have some nuggets in the Trade Policy section.
Mexico reintroduced a 50% tariff on white corn imports after a six-month waiver, citing insignificant impact on prices due to Mexico being self-sufficient in the grain. USDA Secretary Tom Vilsack on Monday offered some comments on the topic. More below.
India’s decision to remove 20% retaliatory customs duty on imported U.S. apples will have a "zero" impact on Indian farmers as the government has sufficient policy space to support growers if there is any implication of the move, a senior government official said on Monday.
AI-based farm equipment, including autonomous machinery, may increase worker safety but also cost jobs in the ag sector.
U.K. sees Biden energy subsidies distorting metals market. Details below.
The National Grain and Feed Association (NGFA) submitted a statement to the House Natural Resources Subcommittee on Water, Wildlife and Fisheries, detailing the importance of lower Snake River dams for the agricultural industry.
Ukraine is looking to adapt to export obstacles by shipping most of its grain and agricultural products via the Danube River. More in Russia & Ukraine section.
A severe heat wave is affecting about 45 million people across the U.S., with a heat dome in the South leading to temperatures in the 100s in Arizona, New Mexico, and Texas. The heat wave is predicted to worsen and last through early next week, while above-average temperatures are anticipated for a large portion of the country over the next three months. This extreme heat poses additional risks, as it increases the likelihood of blackouts, impacting nearly two-thirds of North America this summer.
The Supreme Court is allowing a Louisiana congressional map to be redrawn to add another majority-Black district, lifting a hold on a lower court ruling. Republican lawmakers in Louisiana adopted a congressional map last year that made only one of its six districts majority Black, even though a third of the state's population is Black. A lower court judge found that the map likely violated the Voting Rights Act and blocked it, but the Supreme Court froze the ruling while it decided a similar case in Alabama earlier this month, in which the court unexpectedly sided with Black voters in the state. The rulings in Louisiana and Alabama could improve Democrats' odds of controlling the House in the next election.
Businessman Tim Sheehy has entered the Montana Senate race, launching his campaign website and social media accounts overnight while sharing a launch video with Fox News. This action puts him up against Rep. Matt Rosendale in a potentially fierce GOP primary, as they both vie for the opportunity to challenge Democratic Sen. Jon Tester. More in Politics & Elections.
MARKET FOCUS
Equities today: Asian stock markets were mixed and European stocks mostly firmer overnight. U.S. stock indexes are pointed toward slightly higher openings. In Asia, Japan -0.5%. Hong Kong +1.9%. China +1.2%. India +0.7%. In Europe, at midday, London -0.1%. Paris +0.1%. Frankfurt flat.
U.S. equities yesterday: All three major indices ended lower Monday, with the Dow only falling into negative territory late in the session. The Dow ended down 12.72 points, 0.04%, at 33,714.71. The Nasdaq fell 156.74 points, 1.16%, at 13,335.78. The S&P 500 declined 19.51 points, 0.45%, at 4,328.82.
Traders are watching JPMorgan's nearly $16 billion Hedged Equity Fund's quarterly refresh of its options positions and quarter-end rebalancing as the first half of the year winds down.
Market quotes of note:
- Fed Bank of New York President John Williams highlighted the importance of restoring price stability, but also warned that using rate policy to tame bubbles can bring unwanted economic pain.
- China’s Premier Li Qiang warned governments against politicizing their economies, saying it would only fragment the world, in a keynote speech to global business leaders on Tuesday. “Some in the West are hyping up the so-called phraseologies of reducing dependencies and de-risking,” China’s No. 2 official said at the World Economic Forum’s Annual Meeting of the New Champions in Tianjin, a coastal city close to Beijing in northern China.
- Why would the Fed keep hiking rates if inflation is coming down? The Sevens Report notes that the Fed is likely closely focusing on a recent paper by former Fed Chair Ben Bernanke. It said that the longer a tight labor market is allowed to persist, the greater the chances it becomes a constant source of upward inflation. The Sevens Report writes: “So while the tight labor market was only a small contributor to the inflation of 2021-2022, it could become a source of constant upside inflation in the future, so getting the labor market back into balance should be the priority of the Fed going forward. If the current Fed is listening to Bernanke, then the Fed may be more focused on unemployment than anyone appreciates. If that’s the case then 1) A further drop in CPI wouldn’t cause them to get less hawkish and 2) The Fed has made little progress in returning balance to the labor market and they could well go through with another 50 bps of rate hikes, regardless of CPI declines. Practically, that would increase hard landing chances and reduce soft landing chances, and that would absolutely cause stocks to decline… Practically, here are the takeaways:
- “Jobless claims are possibly the most-important eco-nomic indicator going forward because they simply have to move higher if we’re going to see the type of balance in the labor market that would ease Fed inflation concerns.
- “The unemployment rate must go up, and the sooner the better. Sub-4% unemployment is not indicative of a balanced labor market, it’s indicative of a still-tight labor market.
- “JOLTS need to fall. Yes, the data isn’t 100% accurate but the bottom line is JOLTS are still close to 30% over pre-pandemic levels, so until JOLTS start to fall, it’s tough to believe the labor market is coming into better balance.”
Bottom line: “None of us know for sure what’s in the minds of the people on the FOMC, but Bernanke gave us insight into general ‘central banker think.’ And if the conclusions in his paper and adopted by the Fed, then they may well hike another 50 bps, regardless of whether CPI keeps dropping.”
Lagarde: ECB won’t be able to declare rate peak anytime soon. European Central Bank (ECB) President Christine Lagarde indicated that the central bank will likely be unable to declare an end to its cycle of interest-rate increases soon. The ECB is set to continue raising rates to curb inflation, with a ninth straight rate hike expected in July. Despite fading headline inflation, ongoing underlying price pressures have kept the focus on the latter stages of the ECB's rate push. Experts predict that officials may pause after next month, with money markets expecting a peak of around 4% later in the year. Lagarde stressed the importance of a more persistent policy to tackle the situation, and central bank officials appear to be leaving the door open for further rate increases beyond July.
Central bankers have gathered in Sintra, Portugal, this week to address global economic concerns, focusing primarily on the ongoing battle against inflation. While the ECB's Christine Lagarde reaffirmed her commitment to tackling inflation, the IMF's Gita Gopinath warned that rapidly raising interest rates could trigger financial instability. This "uncomfortable truth" contradicted previous statements from Lagarde and the Federal Reserve's Jerome Powell about balancing inflation and financial stability. Gopinath expressed concern over the delayed effort to reduce inflation to target levels and stated that Powell and Lagarde may have to tolerate higher inflation for longer than they would prefer.
Federal Reserve Chairman Jerome Powell speaks on Wednesday, a few days before the next PCE inflation data are released on Friday.
Global trade decline is negatively impacting Asian exports, leading to lower consumer inflation in Western countries because of decreased producer prices in Asia, the Wall Street Journal reports. These lower prices benefit consumers by reducing prices for items such as home furnishings, electronics, and other manufactured goods. However, the influence of cheaper Asian exports on the economy might be less significant than in previous years due to the peak of globalization having passed. Exports that increased during the pandemic have been declining since late last year due to higher interest rates cooling economic growth. This decline in trade is evident in decreased prices charged for goods at Asian factories, with Chinese producer prices falling 4.6% in May compared to the previous year. Other Asian exporter economies are also experiencing weakening gauges, driven by lower commodity prices and decreasing demand for goods, which weakens the pricing power of companies.
AI-based farm equipment, including autonomous machinery, may increase worker safety but also cost jobs in the ag sector. This new technology includes self-guided tractors, autonomous pesticide sprayers, and towed equipment that can identify valuable crops and weeds autonomously. While this technology is expected to improve safety and working conditions, it may also lead to job losses as machinery replaces human labor in certain tasks. Adoption of AI-based farm equipment is still gradual, with about 50 companies producing autonomous machinery at the moment.
Regulations for autonomous farm machinery are not yet well-defined, with neither the federal Occupational Safety and Health Administration (OSHA) nor most state OSHA counterparts having specific standards for it. The regulation of farm operations is also limited by a federal law that restricts the agencies from inspecting or citing farms that employ 10 or fewer workers annually. In California, however, a rule dating back to the 1970s has been the focus of debate, and the state's Cal/OSHA has granted Monarch Tractor a variance to field test its autonomous tractors.
Despite regulatory uncertainties, most workplace safety experts agree that the use of these technologies in farming is inevitable due to the industry's progress and their potential to improve worker safety.
In May, new orders for U.S. manufactured durable goods exceeded expectations with a 1.7% increase, as opposed to the predicted 1% decline. This follows a revised 1.2% rise in April, making it the third consecutive month of growth in durable goods orders. The surge is mainly attributed to transportation equipment, and orders for non-defense capital goods excluding aircraft — which serve as a measure for business spending plans — rose by 0.7%.
Home prices posted their first year-over-year price decline in 11 years in April, as higher mortgage rates made home purchases more expensive for buyers. The S&P CoreLogic Case-Shiller National Home Price Index, which measures home prices across the nation, fell 0.2% in April, compared with a 0.7% annual growth rate the prior month. The annual decline was the first for the index since April 2012. Compared with the prior month, the index rose 0.5% in April on a seasonally adjusted basis, the third straight monthly increase.
Market perspectives:
• Outside markets: The U.S. dollar was weaker, with the euro and British pound firmer against the greenback. The yield on the 10-year U.S. Treasury note was slightly weaker around 3.72%, with a narrowly mixed tone in global government bond yields. Crude oil futures came under significant pressure, with U.S. crude trading around $68.10 per barrel and Brent around $73.10 per barrel. Gold and silver futures were firmer, with gold around $1,935 per troy ounce and silver around $22.94 per troy ounce.
• U.K. sees Biden energy subsidies distorting metals market. President Biden’s clean-energy law (IRA) — and the massive subsidies it offers — risk distorting the global market for a group of key metals needed to make batteries, solar panels and electrical wiring, U.K. Business Minister Nusrat Ghani said. “The IRA has been a huge challenge,” Ghani said yesterday at the London Indaba mining conference. “The lure of the U.S. is huge. It distorts the market.”
• The National Grain and Feed Association (NGFA) submitted a statement to the House Natural Resources Subcommittee on Water, Wildlife and Fisheries, detailing the importance of lower Snake River dams for the agricultural industry. The statement highlighted that the Columbia-Snake River System, as the third-largest grain export corridor globally, transports 30% of U.S. grain and oilseed exports. According to the NGFA, breaching these dams would cause severe economic harm to the U.S. agriculture value chain and negatively impact global food security. The group also stressed that barge transportation is the most environmentally friendly mode for grains and oilseeds, and alternate options like rail or truck transportation lack the infrastructure capacity needed to replace it.
RUSSIA/UKRAINE
— Russia on Tuesday closed a criminal investigation into mercenary leader Yevgeny Prigozhin and his Wagner group for armed mutiny after President Vladimir Putin pledged to respect a deal ending the biggest threat to his 24-year-rule. “The criminal case initiated on the fact of an armed rebellion by PMC Wagner has been closed,” the Federal Security Service announced, according to the Interfax news service. The rebels stopped actions “aimed at committing a crime,” it said.
Preparations have begun to transfer heavy weaponry from Wagner group to units of the Russian army, Defense Ministry said in a statement on its Telegram channel.
The announcements came amid a report that Prigozhin’s private jet had landed in Belarus, after President Alexander Lukashenko offered to take in the Wagner founder and his fighters as part of the agreement to end Saturday’s rebellion. “I won’t hide it from you. It was very painful to see the events that happened in southern Russia,” Lukashenko said Tuesday at a televised meeting in Minsk.
Putin had offered to close the case and let Wagner fighters and Prigozhin go to Belarus as part of a deal brokered by Lukashenko. Late Monday, he said in an address to the nation: “The promise I made will be fulfilled.”
— It is not clear what would happen to the tens of thousands of mercenary fighters, some of Russia’s most experienced and ruthlessly effective troops, or how that would affect the war in Ukraine. The Russian government has required that all irregular forces fighting for Russia in Ukraine sign contracts with the Defense Ministry by July 1, spelling the end of Wagner’s semi-independence, but it is not clear how many have done so or will do so.
— Putin indirectly addressed a pressing question regarding the recent mutiny in Russia: why the country's larger military did not immediately suppress the rebellion before Wagner forces could gain a foothold. He explained that, following his instructions, measures were taken to avoid excessive bloodshed and to allow those involved in the uprising a chance to reconsider. Deputy Prime Minister Andrei Belousov confirmed that the M-4 highway, damaged during clashes, has been repaired and all air and railway communications have been restored. With the situation stabilizing, Moscow's mayor has lifted restrictions imposed due to the uprising and announced that school graduation ceremonies will proceed this weekend.
— Volodymyr Zelenskyy, Ukraine’s president, said his forces had “advanced in all directions” following a visit to the frontlines in the east and south of the country. Speaking in his nightly address, Zelenskyy was upbeat, promising to free all of the land occupied by Russian forces. He also said that he had spoken to President Joe Biden about additional weapons supplies.
— Ukraine is looking to adapt to export obstacles by shipping most of its grain and agricultural products via the Danube River. The Ukraine Sea Ports Authority has noted that Russia is effectively blocking shipments via the Black Sea. Currently, half of Ukraine's exports leave through Black Sea ports, 25% via the Danube, and the rest via the western border. The exports in May, through three Ukrainian Danube River ports, reached a record of 3 million metric tons (MMT), a significant increase from 5.5 MMT of total cargo in 2021.CHINA UPDATE
— Chinese Premier Li Qiang cautioned governments against politicizing their economies, stating that it may only lead to global fragmentation. The warning comes as the U.S. and Europe increasingly "de-risk" their supply chains from China. Li expressed concerns that the "invisible barriers" introduced in recent years have become pervasive, potentially resulting in confrontation. He spoke during the World Economic Forum in Tianjin.
In only his second significant public address in China since assuming office in March, Li revealed that the country is on track to achieve its 5% growth target. He anticipates an acceleration in economic growth during the second quarter compared to the previous three months.
Support for the yuan has been reinforced by the People's Bank of China (PBOC), which set the daily reference rate 111 pips stronger than average estimates in a Bloomberg survey — the largest premium since November. As a result, the onshore yuan rose by up to 0.45%. Following the PBOC's actions, greater China stocks experienced a rally.
— U.S. Treasury Secretary Janet Yellen is planning a visit to Beijing in early July for high-level economic talks with her Chinese counterpart, marking her first meeting since He Lifeng assumed the position of Vice Premier responsible for economic policy. This comes after Secretary of State Antony Blinken's recent visit to China, which was described as productive by both U.S. and Chinese officials.
Meanwhile, the Biden administration is nearing the completion of an executive order that may regulate or cut off certain U.S. investments in China, related to sectors such as semiconductors, artificial intelligence, and quantum computing. The order may be ready as soon as late July, but the details and timeline are still being finalized.
— China bans ‘negative’ finance writers as stock market sinks. Chinese finance writer Wu Xiaobo and two other unidentified writers have been accused by Sina Corp.'s Weibo of "attacking and undermining" Chinese policy and spreading "negative and harmful information." With 4.7 million followers on the social media platform, Wu is one of China's leading financial writers, contributing to Caixin Global and authoring bestselling books about Tencent Holdings Ltd. and China's economic transformation. The suspension of these writers and deletion of their posts could increase concerns among foreign investors about the availability of independent information on Chinese companies and their economy, especially during times of a worsening investment outlook.
POLITICS & ELECTIONS
— The Supreme Court lifted its hold on a case involving Louisiana's congressional maps, possibly leading to the addition of a Democratic seat. The state’s current congressional delegation is 5-1 Republican, but one-third of the state’s population is Black, and options for creating another Black majority district are being considered. This follows the recent ruling on Alabama's improper gerrymandering, which requires redrawing their map to give minority voters and Democrats a better chance at winning a second seat. A decision is also expected soon on a North Carolina case about the independent state legislature theory, which could impact the 2024 House and presidential races. The ruling could also affect other states like Georgia, Texas, and Florida where redistricting impacts minority voters.
Upshot: The Louisiana matter will end up before the 5th Circuit of Appeals, a conservative appeals court.
— Montana Senate race. To regain the majority in the Senate during the 2024 elections, Senate Republican leadership is supporting military veteran and businessman Tim Sheehy in the Montana primary. Steve Daines, head of the Senate Republicans' campaign arm, has endorsed Sheehy, who aims to draw from his experiences in the military and business world to cast his pragmatic image. Montana is considered one of the Republicans' top pickup opportunities, along with other states like Ohio, Pennsylvania, and West Virginia.
Sheehy's entrance may cause a contentious primary fight, potentially pitting him against Rep. Matt Rosendale, who may also run. The winner of the GOP nomination is expected to face an expensive general election fight. Although Rosendale's fundraising started off slow, with his House campaign committee raising less than $130,000 in the first quarter, he is expected to garner support from the Club for Growth, a group that supports fiscal conservatives.
The winner will challenge Democratic incumbent Sen. Jon Tester, who defeated Rosendale in 2018. Former President Donald Trump won the state by 16 percentage points in 2020.OTHER ITEMS OF NOTE
— The Supreme Court is planning to hear a case that could potentially impact Democrats' proposals to tax the wealthy. The case in question focuses on whether income must be received or realized to be taxed under the 16th Amendment. The outcome of this case could benefit large corporations with billions of dollars, disrupt certain sections of the current tax code, and potentially hinder Democrats' plans to tax affluent Americans based on their unrealized income. Wall Street Journal.
— This week, the Supreme Court is set to decide on major issues, including:
- Affirmative action: Conservative justices may rule against race-based affirmative action for college admissions, leading to significant changes for universities nationwide. The extent of the decision remains unclear.
- Student loans: Six Republican-led states have challenged President Biden's student loan forgiveness plan, and while recent decisions have given progressives hope, the court's questioning was not sympathetic towards the program.
- Election law: The "independent state legislature theory" is being evaluated, which could impact redistricting and election law. Swing votes from Roberts, Kavanaugh, and Barrett hold significant weight.
- LGBT rights: The court will consider the case of a website designer who refuses to create wedding websites for same-sex couples, potentially issuing a more expansive ruling on the intersection of gay rights and freedom of speech.
— Nearly half of U.S. honeybee colonies died last year. In a recent survey by the University of Maryland and Auburn University, it was revealed that U.S. honeybee colonies suffered the second highest death rate on record. Beekeepers lost almost 50% of their managed colonies last year. However, through costly measures to create new colonies, the overall number of U.S. honeybee colonies remained relatively stable. Honeybees play a crucial role in our food supply, pollinating over 100 different crops such as nuts, vegetables, and fruits. Scientists attribute these large die-offs to parasites, pesticides, starvation, and climate change.
