Energy Crisis Across the World Set to Impact Nearly Every Global Economy

WTO Director-General Ngozi Okonjo-Iweala gives somber assessment of world trade, economy

Make sure to check the special Policy Updates filed Monday. Link And for the week ahead in Washington, see this link.

European power prices surged, European currencies hit multidecade lows and governments scrambled to contain the economic hit after Russia cut its main natural-gas pipeline to Europe. EU energy ministers will gather for an emergency meeting in Brussels on Friday to discuss a coordinated response, with gas futures surging more than 280% YTD.

Russia will increase its shipments of oil to Asia after the G7 finance ministers announced a price cap on Russian oil and fuels, to enter into effect from Dec. 5 and Feb. 5, 2023, respectively. “Any actions to impose a price cap will lead to deficit on (initiating countries’) own markets and will increase price volatility,” said Russia’s Energy Minister Nikolay Shulginov on the sidelines of the Eastern Economic Forum in Russia’s Far East, as quoted by Reuters.

The G7 foreign ministers announced the price caps on Friday. Earlier that week, Russian Deputy Prime Minister Alexander Novak said that the price cap was ridiculous and that in response Russia would simply stop selling oil to countries enforcing it.

The British pound is edging up after on Monday touching its lowest level against the dollar in decades. More in Market section.

The U.S. dollar’s strength is lifting Americans’ relative spending power as Fed policy has driven the dollar’s gains as higher rates attract overseas investors’ money.

China’s central bank set the reference rate for the yuan at its weakest level in two years, at 6.91 to the buoyant dollar. China’s currency has suddenly weakened this year after lockdowns hampered exports. The central bank also reduced the amount of foreign currency that Chinese banks need to hold, another sign of its desire to prop up the sliding yuan.

The Reserve Bank of Australia Tuesday raised its main interest rate by 50 basis points to 2.35%, its highest since early 2015. The Bank of Canada rate decision will be Wednesday, and the European Central Bank meets Thursday. Many expect the ECB to raise its main interest rate by 75 basis points.

WTO Director-General Ngozi Okonjo-Iweala said a combination of trade disruptions will continue to cast a pall on the global economic recovery. Details in Market section.

On the policy front, President Biden’s plan to cancel student debt and modify payments for millions of Americans could cost as much as $1 trillion, according to the Penn Wharton Budget Model. Details in Policy section.

Nominations: President Biden will nominate environmental law attorney Richard Revesz to lead the White House’s regulations office (OIRA), which hasn’t had a permanent leader in nearly two years. Meanwhile, on Wednesday the Senate Finance Committee is scheduled to vote on the nomination of USDA adviser Doug McKalip to be the Biden administration’s chief agricultural trade nominee.

California narrowly avoided implementing rotating outages while officials warned that the state’s power grid will face a bigger test today amid a record-breaking heat wave.

Also in California: Gov. Gavin Newsom signed the Fast Act into law. More below.

Australia, one of the world’s largest wheat exporters, will produce another huge crop this season, which is set to boost agricultural export earnings by almost 50% from a decade ago.

Lawmakers are facing a packed September agenda ahead of midterms Nov. 8. See the Congress section for some of the top issues.

This morning the Commerce Department released a plan detailing where roughly $50 billion earmarked by the CHIPS and Science Act will go. Details below.

Liz Truss, 47, officially became the third female prime minister in British history on Tuesday following a transfer of power from her predecessor, Boris Johnson. Her to-do list is long, with the country facing a deepening cost-of-living crisis, a crumbling healthcare service, and a seemingly endless wave of labor strikes.

Equities today: Overseas stocks are broadly higher, with European indexes clawing back some of Monday’s losses that came after Russia said its gas pipeline to the continent would remain closed indefinitely. Europe’s banks are under pressure, despite rising profits, as governments move to introduce new taxes and payment holidays. The Wall Street Journal reported today (link) that “investors around the world are piling into U.S. stocks, even as they brace for the prospect of a rocky autumn, because they say there’s nowhere better to shelter from the turbulence in global markets.” Said one market analyst in the story: “The U.S. looks the least challenged in a very challenging world.” In Asia, Japan flat. Hong Kong -0.1%. China +1.4%. India -0.1%. In Europe, at midday, London +0.3%. Paris +0.6%. Frankfurt +1.1%.

The average U.S.-stock mutual fund or exchange-traded fund is down 17.3% for the year to date, through August, according to Refinitiv Lipper data. That includes a 3.5% average decline in August after Fed Chairman Jerome Powell said the central bank will keep raising interest rates to fight inflation.

Ag markets today: Corn, soybean and wheat futures are trading near session lows this morning. As of 7:30 a.m. ET, corn futures were trading around a penny higher, soybeans were mostly 13 cents lower, SRW wheat was 4 to 5 cents lower, while HRW and HRS wheat futures were mixed. Front-month crude oil futures were mildly weaker, while the U.S. dollar index was modestly firmer this morning.

Technical viewpoints from Jim Wyckoff:

On tap today:

• S&P Global’s U.S. services index for August is out at 9:45 a.m. ET.
• Institute for Supply Management’s services index, due at 10 a.m., is expected to fall to 55.5 in August from 56.7 one month earlier.
• USDA Grain Export Inspections report, 11 a.m. ET.
• USDA Crop Progress report, 4 p.m. ET.

Inflation is high, but U.S. consumers’ relative purchasing power has never been higher. An index that considers inflation when measuring the dollar’s strength relative to currencies of major U.S. trading partners in July topped its previous peak from 2002, showing how the dollar’s surge has helped mitigate rising domestic prices. The Real Effective Exchange Rate for the dollar, calculated by the Bank for International Settlements, measures the currency against a group of key U.S. trade partners, taking into account the changing prices of goods and services in each relevant economy.

WTO Director-General Ngozi Okonjo-Iweala said the following combination of trade disruptions will continue to cast a pall on the global economic recovery:

• Russia’s war with Ukraine is fueling an escalating crisis in global energy and food markets.
• Bottlenecks continue to plague shipping routes and the line of container vessels waiting outside Germany’s North Sea ports has increased in recent weeks.
• Meanwhile, China’s “Covid Zero” approach to combating pandemic continues to shut down some of the world’s largest cities, ports and manufacturing hubs.
• And this summer, extreme weather events demonstrated the devastating impact that climate change can have on supply chains in many of the world’s largest economies.
  

“The outlook is not promising,” Okonjo-Iweala told Bloomberg News in an interview on the sidelines of the Africa Adaptation Summit in Rotterdam. “We are in a risky environment. We are still in multiple crises and exogenous shocks.”

Another bellwether is Russia’s decision to cut off gas exports to European manufacturing powerhouses like Germany, Okonjo-Iweala said. “At some point you will see factories shutting down in Germany for a period of time because of the lack of access to energy — that is huge. The energy crisis is very worrisome, with respect to trade.”

And finally, the food crisis remains a critical aspect for global growth trends because a shortage in fertilizers will increase pressure on food supplies and intensify the cost-of-living crisis. “I’m quite worried that this will last for some time and will carry over into next year,” Okonjo-Iweala said. “Why am I saying that? The availability of fertilizer and inputs for the next planting has been a problem, even for major food producing countries like Brazil and others.”

Perspective: Some analysts note it appears likely that the WTO will downgrade its forecast for growth in merchandise trade after slashing it to 3% in April from its previous projection of 4.7%.

Market perspectives:

• Outside markets: The U.S. dollar index is higher in early U.S. trading. The yield on the 10-year U.S. Treasury note is fetching 3.2%. Brent crude is down around 2.5% at around $93 while WTI is down slightly at $86.32. Gold and silver futures have firmed, with gold around $1,723 per troy ounce and silver around $18.33 per troy ounce.

• The British pound is edging up after on Monday touching its lowest level against the dollar in decades. The pound on Monday slid to its lowest level against the U.S. dollar since 1985, a reflection of the U.K.’s dire economic situation. Investors are braced for sterling to weaken even further to a nadir not seen in more than two centuries of trading across the Atlantic.

• Protests across Indonesia’s biggest cities broke out against government plans to increase subsidized fuel prices for the first time in eight years. On Saturday Joko Widodo, Indonesia’s president, said that inflation had necessitated a price increase of about 30%.

• Freight rates on the main ocean trade routes are sinking during what is typically the industry’s peak season after cargo owners shipped holiday goods early and inflation dented consumer demand. The cost to ship a 40-foot container from China to the U.S. West Coast now stands around $5,400 a box, down 60% from January, according to the Freightos Baltic Index. Market conditions have made a sharp reversal from earlier in the pandemic. Freight rates jumped roughly 10-fold in 2021 because supply-chain disruptions, port backlogs and a surge of cargo left importers scrambling for space on box ships. This year, many retailers ended up with too much inventory after they raced to import goods earlier than usual, anticipating shipping delays and demand that didn’t materialize.

• More union, freight deals. A group of large U.S. freight railroads has reached tentative agreements with two more labor unions — the International Brotherhood of Electrical Workers and the American Train Dispatchers Association, which together represent approximately 6,000 freight rail employees — the National Carriers’ Conference Committee announced in an emailed press release. This brings the total to five of 12 unions that have announced tentative agreements.

• Pakistan’s largest lake is at risk from overflowing and devastating heavily populated areas, officials said. An attempt failed on Sunday to drain Manchar Lake, in the southeastern Sindh province, where heavy rain has fallen for days. The province produces around half of Pakistan’s food, much of which has already been ruined. At least half a million people have lost their homes in catastrophic flooding across the country.

• Grain industry analyst and trader Richard Crow on key ag market items ahead: “The crop report is Monday. Sept 12. The crop size ideas and price adjustments will dominate the week’s market. The market has world headwinds to contend with. Europe’s energy issue and economic situation, China’s economic issues, and how the U.S. will handle the situations. The first thing the market will contend with is the supply issue. The average guess for the report will surface early week. Adjustments in world numbers and s/d ideas from USDA will be issued. A quick look at what early ideas may be:

• A smaller U.S. corn crop — guess likely around 172 bu./ac.
• A soybean crop near unchanged to a half a bu. smaller due to some dry weather
• A larger spring wheat crop
• Larger soybean acres having been planted
• Corn acres a question
• Smaller EU corn crop
• Larger Ukraine exports

“The basis adjustments will begin with the U.S. crops.

“A corn crop of 172 (bu. yield) means corn stays at an accelerated price. If the wheat planted acres are large and the wheat crop progresses, wheat becomes a feed grain in May and June.”

• Another huge wheat crop for Australia. Growers are on track to harvest 32.2 million tons of wheat in 2022-23, just shy of last year’s all-time high of 36.3 million tons, according to government forecaster Abares. That’s up 6.3% from its previous outlook as favorable weather conditions during winter buoyed yield potential across most crops.

A bumper canola crop is also expected, with output seen at 6.6 million tons, the second largest after last season’s record of 6.8 million tons.

• Ag trade: South Korea purchased 65,000 MT of Australian feed wheat and tendered to buy up to 140,000 MT of optional origin corn. Taiwan tendered to buy 55,375 MT of U.S. milling wheat.

• California declares grid emergency as odds of blackouts accelerate. California declared a power grid emergency Monday as a blistering and sustained heat wave threatens to push the state’s electricity system beyond its limit. “Rotating outages are a possibility today,” said Elliot Mainzer, chief executive officer of the California Independent System Operator, known as Caiso, which runs the state’s grid. To avoid blackouts, consumers will need to ramp up conservation by two or three times, Mainzer said Monday during a media briefing. “We are now moving into the extreme part of this heat wave, and really stepping up those actions will be essential for maintaining reliability,” Mainzer said. If voluntary conservation measures fall short Monday, Caiso will declare a level-2 grid emergency, which would free up more generation supplies, he said. Rotating blackouts would be used as a last resort. Much of California is under an excessive heat warning for the next four days.

Bottom line: California expects record demand today, as a heatwave that has pushed temperatures past 110 degrees Fahrenheit threatens to stretch the state’s electricity system to its limit.

• NWS weather: Dangerous and record-breaking heat continues from California to the northern/central Plains through Thursday... ...Critical fire weather over parts of the northern High Plains on Wednesday... ...Unsettled weather and scattered flash flood chances linger over the Northeast, Appalachians, and Gulf Coast into midweek.

Items in Pro Farmer’s First Thing Today include:

• Varied post-holiday price tone
• Argentina boosts exchange rate for soy exports
• Firm cuts EU sunseed crop forecast, raises rapeseed estimate
• China to sell more pork from reserve stockpiles.
• Post-holiday trade key for cattle futures
• Cash hog fundamentals continue to weaken

— Summary: Ukraine’s allies should do their utmost to help end Russia’s invasion fast as Moscow is willing to keep fighting for a long period, Ukrainian Prime Minister Denys Shmyhal said on Bloomberg TV. Meanwhile, the Zaporizhzhia nuclear plant was disconnected from Ukraine’s power grid after renewed shelling. It is now using one of its own reactors to power critical cooling systems. Lastly, former Russian soldier Pavel Filatyev gave a detailed accounting of why Russia’s invasion went wrong early on (link for details).

• Vladimir Putin, Russia’s president, attended military exercises in the east of the country involving China and other allies such as Syria and India. The drills are due to last a week. On Monday Putin approved a new foreign-policy doctrine, which seeks to justify armed intervention into countries with Russian-speaking populations.
• Germany to keep nuclear plants on standby in case of energy crunch. The economy minister says two out of three facilities set to close at end of year will now be available until April if necessary.

• The Financial Times reported that the EC would recommend options for an “emergency wholesale natural gas price cap,” to be observed by all member-states, along with ways to reduce demand.

  Meanwhile, Liz Truss, who replaces Boris Johnson as Britain’s prime minister today, has drafted a plan to freeze energy prices for British households, which are expected to rise by 80% in October. According to Bloomberg, the plan, costing up to £130bn ($151 billion), will compel energy suppliers to charge households reduced rates in exchange for government-guaranteed loans.

— President Biden’s plan to cancel student debt and modify payments for millions of Americans could cost as much as $1 trillion, according to the Penn Wharton Budget Model, a widely regarded analysis frequently cited by policy makers. Other analysts say the total bill could be nearly $500 billion, a range that shows the uncertainty and complexity of projecting the student-loan portfolio’s performance. The latest estimates challenge the administration’s efforts to scale down the federal deficit. Analysts expect strong interest in both debt cancellation and in programs that allow borrowers to pay a lower percentage of their income to keep up with their loans. The expected popularity of the policy could drive up costs and raise questions about whether the expense can be offset by other Biden administration policies. The White House hasn’t released comparable estimates of the policy’s total cost, though it said the debt-cancellation portion of the plan alone would reduce revenue the government receives from student-loan payments by about $240 billion over a decade.

— Biden nominates Revesz to head regulations office. Biden will nominate environmental law attorney Richard Revesz to lead the White House’s regulations office (OIRA), which hasn’t had a permanent leader in nearly two years. The role will be especially important if Democrats lose control of Congress, which will force Biden to advance much of his agenda through regulation. His administration’s latest regulatory to-do list, released in June, included nearly 2,700 agenda items that defined his ambitions to increase federal oversight of transportation.

— Nominations: In the Senate, there’s a slate of President Joe Biden’s transportation nominees up for consideration. Robin Hutcheson, the nominee to head the Federal Motor Carrier Safety Administration, is waiting for floor confirmation after a committee advanced her in June. Phil Washington, tapped to lead the Federal Aviation Administration, and Shailen Bhatt, nominated for Federal Highway Administration chief, both await nomination hearings in committee. Biden has to name a replacement since the National Highway Traffic Safety Administration is losing its Senate-confirmed official this month.

USTR ag trade nominee. On Wednesday the Senate Finance Committee is scheduled to vote on the nomination of USDA adviser Doug McKalip to be the Biden administration’s chief agricultural trade nominee.

— China to accelerate rollout of stimulus measures. It’s “crucially important” for the country to adopt supportive policies this quarter, Yang Yinkai, deputy secretary general at the National Development and Reform Commission, told reporters in Beijing on Monday. He was speaking alongside officials from the central bank and other government ministries. Yang and other officials noted that 300 billion yuan ($43.6 billion) in funds have been distributed via a policy bank financing program intended to spur infrastructure investment this year. Local governments have also sold 3.5 trillion yuan worth of special bonds through August, they said, including almost all of the bond quota allocated for construction projects.

Meanwhile, central bank Deputy Governor Liu Guoqiang addressed the yuan currency’s weakness, saying authorities will be able to keep the yuan stable. Shortly after his comments, the PBOC cut the foreign-currency reserve ratio by 2 percentage points, a move aimed at boosting the yuan. “Movements that are reasonable, equilibrium and basically stable is what we’d like to see,” Liu said, adding that such a trend would “not be allowed to change.” The yuan just capped its sixth consecutive month of declines -- the longest period of depreciation since it weakened in October 2018 while trade tensions with the U.S. were escalating. The offshore yuan weakened to 6.9551 per dollar on Monday, a fresh two-year low.

— Some 60 million people in China are facing more Covid lockdowns, from Chengdu to Shenzhen to Daqing. Meanwhile, Shanghai called off the Lujiazui Forum, the city’s most important financial conference, the day before it was scheduled to start after officials detected a new Covid-19 infection for the first time in a week.

— Economic malaise and the impact of Covid-19 restrictions are causing some young Chinese to postpone plans to get married or have children, running counter to Beijing’s efforts to lift births. Some demographers now see 2022 as the year that China’s population starts to shrink, partly because of growing uncertainty among the young about how to earn a living. Link for more via the WSJ.

— The Biden administration has leased fewer acres for oil-and-gas drilling offshore and on federal land than any other administration in its early stages dating back to the end of World War II, according to a Wall Street Journal analysis (link). Biden pledged to stop drilling on federal lands as a candidate, saying the nation needs to transition to clean energy. He softened his stance as oil prices soared following Russia’s invasion of Ukraine — calling for boosting oil supplies to ease runaway inflation — but he has nonetheless spurned a leasing program that for decades has been a go-to asset for presidents looking to raise U.S. energy production.

— The energy historian who says rapid decarbonization is a fantasy. Link to an LA Times article.

— Fact Act gets California governor’s signature. Democratic Governor Gavin Newsom of California signed a bill that drastically increases the state’s oversight of the fast-food industry. The bill will set up a 10-member council composed of representatives from labor and employers to oversee the industry’s labor practices in California. The council can raise the industry minimum as high as $22 an hour next year, versus a $15.50 minimum for the rest of the state, after which the minimum will be adjusted for inflation. The council can also issue new labor standards.

— Summary:

• Global Covid-19 cases at 605,602,474 with 6,503,674 deaths.
• U.S. case count is at 94,768,178 with 1,047,563 deaths.
• Johns Hopkins University Coronavirus Resource Center says there have been 610,012,616 doses administered, 224,113,439 have been fully vaccinated, or 68.02% of the U.S. population.

— Freight Rail: Democrats will be pushing to pass a bill (HR 8649) that would give enhanced powers to the Surface Transportation Board that aims to address freight rail service disruptions. House Transportation and Infrastructure Chair Peter DeFazio (D-Ore.), who is retiring after this term, said in a note last week that he looked “forward to passing” the freight rail bill and Coast Guard reauthorization legislation “as we enter the last legislative push of this Congress.”

— Lawmakers are facing a packed September agenda ahead of midterms Nov. 8. Top legislative items include government spending, defense authorization. House, Senate leaders also are eyeing action on judicial nominations and policies related to environmental permitting, election rules, same-sex marriage, and U.S./China competition trade issues.

— $50 billion in CHIPS. This morning the Commerce Department released a plan detailing where roughly $50 billion earmarked by the CHIPS and Science Act will go. The funding which was approved by Congress in July, is meant to bolster chip production in the U.S., as well as lower America’s reliance on China and other foreign countries for semiconductors. Trade experts say it’s America’s most significant investment in industrial policy in at least half a century.

CHIPS funds will be spent on R.&D., securing the supply chain and training new workers, according to the Commerce Department. Under the plan, the Biden administration will create two new government offices to implement the program. But the government isn’t rushing to spend the funds — the application process likely won’t open before February, and the money won’t be distributed until spring.

Nearly $30 billion will be devoted to “large scale” investments in “leading-edge” chip manufacturing, the plan says. The government also plans to use $6 billion for loans or loan guarantees. Those loans, according to the strategic plan, will effectively increase the government’s investment in the semiconductor industry by 50%, to $75 billion. The plan also puts taxpayers on the hook for larger losses if the loans aren’t repaid.

WASDE | Crop Production | USDA weekly reports | Crop Progress | Food prices | Farm income | Export Sales weekly | ERP dashboard | California phase-out of gas-powered vehicles | RFS | IRA: Biofuels | IRA: Ag | Student loan forgiveness | Russia/Ukraine war, lessons learned | Election predictions: Split Ticket |