Forex Markets Remain Focused on Yen, Yuan

Xi in France | U.S. weather woes | Tyson Foods | Buffet predicts higher taxes | Bird flu

Jim Wiesemeyer

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May 06, 2024 08:15 AM

Xi in France | U.S. weather woes | Tyson Foods | Buffet predicts higher taxes | Bird flu

Today’s Digital Newspaper

MARKET FOCUS

Tyson Foods exceeds Wall Street’s expectations for second-quarter profit
Trouble at Starbucks
On Tuesday, BP reports first-quarter numbers
Warren Buffett: Taxes likely to rise as lawmakers look to narrow federal deficit
Malanga: A ‘scent’ of stagflation in U.S. economic landscape
Yellen says ‘rumors’ of yen intervention; yen wipes out Friday gains
Eurozone services PMI beat estimates
ECB increasingly considering rate cut in June as services inflation begins to decrease
Red Sea continues to cause delays in shipments as many opt to reroute away
Ag markets today
Grains lower to start the week
Bullish cash cattle expectations
Hog premiums narrow
Robusta coffee prices surge to highest level in 45 years
Appeals court in the Philippines halts ‘golden rice’
Ag trade update
Rising climate volatility is fueling demand for weather derivatives
NWS weather outlook
Pro Farmer First Thing Today items

CONGRESS

House may vote on a bill to count & exclude non-citizens from 2030 census

ISRAEL/HAMAS CONFLICT

Talks with Hamas over a cease-fire deal hit standstill

RUSSIA & UKRAINE

FT: Russian finance flows slump after U.S. targets Vladimir Putin’s war machine
Ukrainian grain exports in 2023-24 reach nearly 42 million metric tons

POLICY

More action on new farm bill expected this week

CHINA

Yuan down 6% from recent peak vs basket of major trading partners’ currencies

TRADE POLICY

FT: EU urging China to keep agriculture out of escalating trade disputes
Biden admin continues to insist Mexico’s GMO corn for food ban not science-based

LIVESTOCK, NUTRITION & FOOD INDUSTRY

WSJ: Consumers dissatisfied with rising food costs, shift away from well-known brands
Canada toughens import requirements on U.S. breeding cattle due to H5N1

POLITICS & ELECTIONS

Trump’s campaign told prospective donors he has a chance to win Minn. and Va.

OTHER ITEMS OF NOTE

70%: The effective tax rate for many cannabis businesses

MARKET FOCUS

— Equities today: Asian and European stock indexes were mixed overnight. U.S. stock indexes are pointed to toward higher openings. It’s a delayed start to the week for the financial markets in London, Tokyo and Seoul due to the May Day and Children’s Day public holidays. China returned from a three-day holiday. In Asia, Japan closed. Hong Kong +0.6%. China +1.2%. India flat. In Europe, at midday, London +0.5%. Paris +0.8%. Frankfurt +1%.

U.S. equities Friday: U.S. stocks closed sharply higher Friday, as Treasury yields fell after a softer-than-anticipated April jobs report (bad news is good news again). The Dow gained 450.02 points, 1.2%, to close at 38,675.68. The S&P 500 rose 63.59 points, 1.3%, to finish at 5,127.79, while the Nasdaq jumped 315.37 points, 2%, to end the session at 16,156.33.

For the week, the Dow climbed 1.1%, the S&P 500 gained 0.6%, and the Nasdaq rose 1.4%. The Nasdaq and S&P 500 each booked back-to-back weekly gains, while the Dow rose for a third-straight week.

— Tyson Foods exceeded Wall Street’s expectations for second-quarter profit, benefiting from the closure of some chicken processing plants to cut costs. The company’s shares rose by 3.5% in premarket trading, continuing a year-to-date increase of over 15%. Tyson has shut down six U.S. chicken plants since last year, alongside layoffs and plans to close a pork plant, aimed at cost reduction. This strategy led to adjusted earnings of 62 cents per share, surpassing analysts’ average estimate of 39 cents. However, Tyson faces challenges such as slowing demand due to price-conscious consumers seeking more affordable options amidst high food prices and borrowing costs. Second-quarter net sales dipped by 0.5% to $13.07 billion, slightly below estimates. Chicken segment sales declined by 8.3% despite a 2.1% price drop, with volumes falling by 6.1%. Conversely, beef segment volumes rose by 2.8%, marking the first increase in five quarters, while the pork segment also saw a volume increase of 2.9%. Tyson anticipates flat total sales for fiscal 2024 compared to the previous year’s $52.88 billion.

— Trouble at Starbucks has prompted former Starbucks chief Howard Schultz to comment on the situation. “I’ve emphasized that the company’s fix needs to begin at home: U.S. operations are the primary reason for the company’s fall from grace,” he wrote on LinkedIn, adding that the coffee giant needs to refocus on the customer experience after Q2 earnings “significantly” missed expectations. The company’s stock has declined 17% since then after slashing its guidance.

— On Tuesday, BP reports first-quarter numbers, with analysts expecting strong growth in gas trading but weaker fuel margins.

— Ag markets today: Corn, soybeans and wheat pulled back from the strong gains late last week during the overnight session, led lower by sharp losses in the wheat market. As of 6:30 a.m. ET, corn futures were trading 1 to 2 cents lower, soybeans were 1 to 3 cents lower, SRW wheat was 9 to 10 cents lower, HRW wheat was 16 to 17 cents lower and HRS wheat was 10 to 13 cents lower. Front-month crude oil futures were around 70 cents higher, and the U.S. dollar index was trading just above unchanged.

Bullish cash cattle expectations. Cash cattle prices firmed last week as packers showed more interest in buying cattle than initially expected. As a result, traders start this week with expectations of firmer cash prices again, though recent hefty purchases by packers, deeply negative cutting margins and the fresh availability of contracted supplies could limit their willingness to raise cash bids.

Hog premiums narrow. The CME lean hog index is up 4 cents to $90.96 as of May 2. May lean hog futures, which expire May 14 and are cash settled on May 16, finished Friday $1.465 above today’s cash quote, while the premium in June hogs tightened to $7.99.

— Agriculture markets Friday:

Corn: July corn futures rose 1/2 cent to $4.60 1/4, nearer the session low but did close at a three-month-high close today. For the week, July corn gained 10 1/4 cents.
Soy complex: July soybeans rallied 16 cents to $12.15 and notched a weekly gain of 39 cents. July soymeal closed $7.30 higher at $372.20 and picked up $27.50 on the week. July soyoil fell 16 points to 43.08 cents and is down 246 points from a week ago.
Wheat: July SRW wheat futures rose 18 1/4 cents to $6.22 1/2 and nearer the session high. For the week, July SRW gained 1/2 cent. July HRW wheat futures closed up 13 3/4 cents to $6.50 1/4 and near mid-range. For the week, July HRW fell 4 cents. July spring wheat futures gained 5 1/4 cents to $7.14 1/2. That represented a weekly rise of 16 3/4 cents.
Cotton: July cotton rose 244 points to 78.06 cents, but still lost 284 points on the week.
Cattle: Cattle futures moved mostly higher Friday, while feeders were mixed. June live cattle skidded 12.5 cents to $176.675, which represented a $1.90 drop from last Friday. May feeder futures slid 30 cents to $243.30, marking a weekly decline of $5.40. The cash cattle market remained firm through Thursday, with modest numbers of steers trading in Iowa/southern Minnesota and Nebraska at $186.77.
Hogs: June futures slid 97.5 cents to $98.95, with the close representing a $3.525 weekly drop.

— Quotes of note:

Taxes are likely to rise as lawmakers look to narrow the federal deficit, Warren Buffett said, as Washington prepares for major tax negotiations next year. The Berkshire Hathaway chair and CEO, speaking Saturday at the company’s annual meeting in Omaha, sidestepped directly commenting on the partisan fight over corporate taxes taking shape. But he said his company will pay whatever the rate is, whether the current 21% or something higher. “With present fiscal policies, I think that something has to give,” Buffett said. “Higher taxes are quite likely, and if the government wants to take a greater share of your income or mine or Berkshire’s, they can do it. And they may decide that someday they don’t want the fiscal deficit to be this large.”
Investing legend Warren Buffett delivered a stark warning about artificial intelligence, likening the technology’s rise to the development of nuclear weapons in World War II. “We let a genie out of the bottle when we developed nuclear weapons ... and the power of that genie scares the hell out of me.” “AI is somewhat similar, it’s part of the way out of the bottle, and it’s enormously important, and it’s going to be done by somebody so we may wish we’d never seen that genie or it may do wonderful things.” Buffett made his remarks at Berkshire Hathaway’s annual meeting in Omaha, Nebraska.
“There is still an enormous incentive to use the Chinese supply chain. China is incredibly competitive at this exchange rate.” — Brad Setser of the Council on Foreign Relations, on the falling value of the yuan (see related item in China section).

— Dr. Vince Malanga: A ‘scent’ of stagflation in the U.S. economic landscape but he doesn’t fully commit to the characterization in his latest assessment. While the U.S. gov’t reported moderate real GDP growth of 1.6% annually in the January-March quarter, coupled with inflation at 3.1%, Malanga, president of LaSalle Economics, concludes the overall view remains cautious. Instead of directly labeling it as stagflation, he suggests looking at the average of the past two quarters, which shows 2.5% GDP growth and 2.5% inflation.

The Federal Open Market Committee’s (FOMC) recent decision to maintain the benchmark rate at 5.3% without implementing earlier promised rate cuts may lead to regrets, Malanga believes, especially if the economy continues on its current trajectory. Inflation seems to be persisting, potentially hovering around 3%, despite the Fed’s expectations.

Concerns about the economy’s resilience are raised by Malanga, particularly regarding rising mortgage rates and consumer financial strain, juxtaposed with record wealth in equity markets and ongoing gov’t spending. Despite full employment, the federal deficit remains significant, prompting concerns over its impact on fixed income markets.

Malanga predicts modest real GDP growth between 1.5% and 2% for the remainder of the year, along with inflation ranging from 3% to 3.5%. Whether this constitutes stagflation is left open for debate, he says, but the focus remains on the potential pressure it could place on fixed income markets. The FOMC’s decision to modify or terminate its balance sheet reduction program in June is seen as a move to support these markets, although concerns about mark-to-market losses on private sector balance sheets persist. If the jobless rate starts to climb above 4%, Malanga says discussions about rate cuts may resurface, alongside the moderation in balance sheet reduction.

— Eurozone services PMI beat estimates at 53.5 vs. (E) 52.9, pushing back on EU recession risks. In March 2024, industrial producer prices in the Eurozone decreased by 0.4% compared to the previous month, aligning with forecasts. This decline marked the fifth consecutive monthly decrease, following a revised 1.1% fall in February. The drop was primarily fueled by a continued decrease in energy costs, which fell by 1.8% compared to a 3.6% decrease in February. Additionally, prices for capital goods and durable consumer goods eased slightly. However, costs advanced for intermediate goods and non-durable consumer goods. Excluding energy, producer prices rose by 0.2%, following a 0.1% increase in February. On a yearly basis, producer prices decreased by 7.8%, slightly higher than market expectations of a 7.7% decrease.

— European Central Bank (ECB) is increasingly considering a rate cut in June as services inflation begins to decrease, according to Chief Economist Philip Lane, who mentioned to El Confidencial newspaper that both the April inflation estimate for the euro area and the first-quarter GDP figures boost his confidence that inflation will return to the target level in due time. He emphasized the ECB’s ongoing focus on services to ensure that disinflation continues. This potential rate cut contrasts with the stance of the U.S. Federal Reserve, which indicates a reluctance to lower rates as inflation has not yet shown sustained movement towards the Fed’s 2% target. Concerns have risen about a widening gap between U.S. and ECB rates potentially weakening the euro and stimulating ECB inflation.

Market perspectives:

— Outside markets: The U.S. dollar index was firmer, despite the euro, yen, and British pound all being higher against the U.S. currency. The yield on the 10-year U.S. Treasury note was weaker, trading around 4.48%, with a mostly weaker tone in global government bond yields. Crude oil futures remained higher ahead of U.S. trading, with U.S. crude around $78.90 per barrel and Brent around $83.65 per barrel. Gold and silver were sharply higher, with gold around $2,330 per troy ounce and silver around $27.39 per troy ounce.

— Yen wiped out its Friday gains. The currency slid 0.5% in Asian trading on Monday, wiping out its advance in the last session. On Friday, the yen spiked to touch a level unseen in three weeks, as soft U.S. jobs data triggered a selloff in the dollar and prompted traders to bring forward rate-cut bets for the Federal Reserve. The yen remains the worst performing major currency so far this year with a loss of more than 8% against the dollar. Japan’s top currency official Masato Kanda has declined to comment on whether the authorities had intervened. U.S. Treasury Secretary Janet Yellen called reports of intervention “rumors.” However, she said the U.S. would expect interventions to be rare and consultations to take place.

— Red Sea, where Houthi rebels are targeting commercial vessels, has caused delays in shipments as many opt to reroute away from the area. This ongoing disruption in container shipping is highlighted by Maersk, which forecasts a potential capacity reduction of up to 20% between Asia and Europe in the second quarter. Maersk warns that the risk zone has expanded, with attacks extending further offshore, leading to longer journeys and increased costs to deliver cargo. Fuel costs for the shipping company have surged approximately 40% due to these disruptions. Similarly, German shipper Happag-Lloyd is redirecting shipments away from the Suez Canal due to the situation in the Red Sea, anticipating a capacity decrease of 15% to 20% between Asia and northern Europe in the second quarter.

— Robusta coffee prices have surged to their highest level in 45 years, reports the International Coffee Organization. This spike is driven by a worsening supply shortage of the variety commonly used in espresso blends and instant beverages.

— An appeals court in the Philippines has halted the production, sale, and testing of “golden rice,” a genetically modified rice variety engineered to contain vitamin A. The court cited the lack of scientific consensus on the rice’s safety as the reason behind the decision. One of the developers of golden rice described the ruling as a “catastrophe.” Link for details.

— Ag trade update: Algeria purchased an unknown quantity of corn but made no buys of soymeal in a tender for up to 160,000 MT of corn and 70,000 MT of soymeal. Taiwan tendered to buy up to 65,000 MT of corn from the U.S., Brazil, Argentina or South Africa.

— Rising climate volatility is fueling demand for weather derivatives. Companies and investors are increasingly recognizing the significance of meteorological risks and are turning to a specialized area of Wall Street to mitigate them. The escalating unpredictability of climate patterns is driving the need for weather derivatives, which offer protection against weather-related financial losses. According to CME, the average trading volumes for such derivatives listed products surged by over 260% in 2023, indicating a growing demand. The market for these derivatives could potentially be valued as high as $25 billion based on notional value, showcasing the substantial scale of this niche yet crucial sector in finance.

— NWS weather outlook: There is a Moderate Risk of severe thunderstorms over parts of the Central/Southern Plains on Monday and a Slight Risk across the Ohio Valley on Tuesday... ...There is a Slight Risk of excessive rainfall over the Northern High Plains and Central Plains/Middle Mississippi Valley on Monday... ...Heavy snow over the higher elevations from the Pacific Northwest to the Northern/Central Rockies.

Items in Pro Farmer’s First Thing Today include:

• Grains lower to start the week
• Wetter pattern to persist across major U.S. crop areas
• Forex markets remain focused on yen, yuan

CONGRESS

— U.S. House of Representatives may vote on a bill this week that proposes counting and excluding non-citizens from the 2030 census. This decennial census is crucial as it determines the allocation of House representatives and electoral college votes for each state. The bill is one of many similar measures introduced by Republican lawmakers, who are advocating for significant alterations to the country’s election maps.

ISRAEL/HAMAS CONFLICT

— Talks with Hamas over a cease-fire deal hit a standstill as the main sticking point was the Iran-backed militant group’s insistence that any truce is permanent. This comes as Israel warned Gazans to evacuate some areas of eastern Rafah ahead of a planned offensive there. Israel said it had begun ordering 100,000 people in Rafah, a city in southern Gaza, to evacuate to a nearby Israel-declared humanitarian zone. Israeli officials said the planned operation was of “limited scope” and did not confirm whether it was the start of an invasion of Rafah.

Meanwhile, Israeli officials raided the office of Al Jazeera after the cabinet voted to suspend the news agency’s operations in the country. In April Israel’s parliament passed legislation allowing the temporary closure of foreign broadcasters whose coverage is deemed to threaten national security. Al Jazeera, which is based in Qatar, has been consistently critical of Israel’s actions in Gaza.

Market impact: Oil prices are rallying moderately following the breakdown of Israel/Hamas cease-fire talks.

RUSSIA/UKRAINE

— U.S. crackdown on banks facilitating trade for Russia’s invasion of Ukraine has significantly disrupted financial flows in and out of Russia, impacting its trade with key partners like Turkey and China, the Financial Times reports (link). The U.S. executive order, aimed at banks aiding Russia in acquiring critical products for its war effort, has led to a drop in trade volumes and increased difficulty in accessing financial services necessary for acquiring goods.

The order has prompted international banks to sever ties with Russian counterparties, leading to a growing reliance on middlemen to navigate transactions and increased currency conversion costs. The goal of the US measures is to impede financial flows, increase costs, and create friction in Russia’s trade operations.

This crackdown has caused a decline in war-related exports, as banks fear repercussions from the U.S. and are hesitant to engage in transactions involving Russian entities. Larger financial institutions have scaled back transactions with Russia, forcing Russian traders to seek alternative methods and smaller banks. This shift has led to a rise in commissions on export transactions, impacting companies like Norilsk Nickel.

While major banks avoid dealing with Russia, traders are exploring alternative currencies and smaller banks. There’s a growing complexity in transactions, making it harder for regulators to track and enforce sanctions effectively. Russian entities are increasingly settling trades in rubles to circumvent challenges in exchanging currency for dollars and euros, creating a loophole in sanctions enforcement.

Bottom line: Overall, the U.S. crackdown has disrupted financial flows, increased transaction costs, and prompted a shift towards alternative currencies in Russia’s trade operations, posing challenges for both Russian entities and enforcement authorities.

— Ukrainian grain exports in 2023-24 have hit nearly 42 million metric tons (MMT) as of May 6, according to Agriculture Ministry data, down from 42.6 MMT for the same period in 2022-23. Shipments so far in 2023/24 include 23.3 MMT of corn, 16 MMtTof wheat, and 2.2 MMT of barley.

POLICY UPDATE

— More action on new farm bill expected this week. Link to details via what we reported Sunday in The Week Ahead.

CHINA UPDATE

— China’s yuan has fallen 6% from a recent peak compared with a basket of its major trading partners’ currencies, which has helped turbocharge the country’s export boom. The real effective exchange rate for the yuan, which adjusts for inflation disparities between China and its major trading partners, has reverted to its 2014 level, marking the end of a decade-long trend of appreciation. This depreciation of China’s currency is boosting the country’s overseas sales significantly, potentially at the expense of other exporting nations. The situation underscores the substantial influence that currency values wield over the international flow of goods in trade. China’s export volumes have surged by 10%, while those of emerging Asian countries have decreased by nearly 2%.

TRADE POLICY

— European Union (EU) is urging China to keep agriculture out of escalating trade disputes, emphasizing the need to protect the agricultural sector from tensions arising in industries like renewable energy and electric vehicles, the Financial Times reports (link). The EU has launched investigations into Chinese suppliers allegedly violating foreign subsidies regulations, aiming to address distortions favoring third-country companies in the EU.

EU Agriculture Commissioner Janusz Wojciechowski stressed the importance of safeguarding agriculture as a strategic sector, separate from other trade disputes. Despite being China’s second-largest trading partner, the EU has raised concerns over industrial overcapacity and trade imbalances.

While the EU runs a surplus in agrifood trade with China, there are worries that disputes in other sectors could lead to retaliation affecting agricultural exports. The EU agricultural lobby group Copa Cogeca highlighted the risk of retaliation, citing Australia’s experience with Chinese sanctions on agricultural exports amid political disputes.

Despite concerns, there are indications of China’s willingness to maintain agricultural trade, such as lifting a ban on Belgian pork products imposed due to swine flu. However, EU agrifood exports to China have decreased, partly due to challenges like higher energy costs.

President Xi Jinping’s visit to Europe signals ongoing discussions on trade and agricultural cooperation between the EU and China.

EU officials have told the Financial Times that preliminary duties on EVs could be imposed in May, while permanent tariffs that need the support of a majority of member states could follow in November. Researchers at the Rhodium Group said the duties on Chinese EV imports to the EU could range from 15% to 30%.

— Biden administration continues to assert that Mexico’s ban on GMO corn for food imports lacks a scientific basis, as evidenced by a filing submitted to the U.S.-Mexico-Canada Agreement (USMCA) dispute settlement panel. The U.S. rebuttal argues that Mexico’s submission to the panel contains factual and legal inaccuracies. It cites the Biotechnology Committee of the Mexican Academy of Sciences, which states that there is no confirmed evidence of harm from transgenic organisms. The U.S. claims that Mexico not only disregarded scientific evidence but also violated several provisions of the USMCA. The U.S. filing, spanning 120 pages, repeatedly highlights factual errors in Mexico’s submission. The dispute settlement panel is anticipated to issue its ruling on the matter later this year.

LIVESTOCK, NUTRITION & FOOD INDUSTRY

— Consumers are showing their dissatisfaction with rising food costs by shifting away from well-known brands, impacting companies like Starbucks, McDonald’s, and Kraft Heinz, the Wall Street Journal reports (link). For years following the Covid-19 pandemic, food companies raised prices to offset their own increased costs, assuming consumers would adapt. However, consumers are now hitting their limits, leading to sliding sales or slowing growth for many food manufacturers and restaurant chains.

Fast-food prices have risen significantly, with prices in March 2024 being 33% higher than in 2019. Similarly, grocery prices have increased by 26%. This has resulted in a decline in both fast-food traffic and grocery sales volume. Consumers, particularly low-income individuals, are reining in spending, as seen in decreased loyalty program memberships and reduced purchases.

The dissatisfaction extends beyond restaurants to packaged-food giants like Kraft Heinz and Mondelez International, whose sales have been impacted by higher prices and reduced food-stamp benefits. Mondelez, for example, is facing pressure on cookie sales, particularly with brands favored by lower-income shoppers, as consumers opt for cheaper store-brand alternatives.

To address consumer rebellion, food companies are adjusting their strategies. Some are offering more promotions and clearer communication about deals, while others are introducing pricing specials and smaller pack sizes. However, some chains like Domino’s Pizza and Cava are resisting price hikes to maintain customer loyalty.

In response to changing consumer behavior, Starbucks is emphasizing value alongside its premium image, introducing app-exclusive deals for non-loyalty members. Overall, food companies are adapting their strategies to navigate the challenges posed by consumer pushback against rising food costs.

— Canada toughens import requirements on U.S. breeding cattle due to H5N1. The Canadian Food Inspection Agency (CFIA) toughened import requirements on U.S. breeding cattle due to the H5N1 virus, the agency said late Friday. Import measures for cattle from the U.S. will now include negative H5N1 test results for lactating dairy cattle, testing of milk at the retail level to look for viral fragments of the virus and voluntary testing of cows that do not have clinical signs of the virus, CFIA said.

POLITICS & ELECTIONS

— Donald Trump’s campaign told prospective donors that internal polls show he has a chance to win Minnesota and Virginia. Joe Biden carried both states decisively in 2020.

OTHER ITEMS OF NOTE

— 70%: The effective tax rate for many cannabis businesses, because the federal tax code currently bars them from claiming deductions on many basic business expenses. (For some, it’s even higher.) But if the Biden administration follows through on its plan to reclassify marijuana as a less dangerous drug, it could lift the income-tax burden on licensed cannabis retailers and allow them to become profitable for the first time. (Source: Wall Street Journal)

KEY LINKS

Policy Updates