Harris Taps Walz as VP Pick… But Can He Boost the Rural Vote?

News/Markets/Policy Updates: Aug. 6, 2024

I fell and I can’t get up was the literal message I had over the weekend in a bad fall. This report will likely be later than usual for a while. I hurt my neck and right shoulder. It doesn’t just hurt when I laugh. I see my primary doctor this afternoon.

— Equities today: Asian and European stock indexes were mostly higher overnight. Japan’s Nikkei closed 10% higher Tuesday, recovering much of Monday’s 12.4% loss. In Asia, Japan +10.2%. Hong Kong -0.3%. China +0.2%. India -0.2%. In Europe, at midday, London +0.1%. Paris -0.2%. Frankfurt +0.3%. U.S. Dow is currently up around nearly 400 points. The overnight rebound came after all three major U.S. indexes suffered a major sell-off on Monday, sparked by fears that the US economy is slowing faster than expected.

U.S. equities yesterday: All three major indices posted sizable losses to open the week as a global rout in equities markets washed ashore in the US after declines in Asian and European markets. The Dow fell 1,033.99 points, 2.60% at 38,703.27. The Nasdaq declined 576.08 points, 3.43%, at 16,200.08. The S&P 500 lost 160.23 points, 3.00%, at 5,186.33.

— Google lost a significant antitrust lawsuit on Monday regarding its search dominance, a ruling that could fundamentally change how millions of Americans access information online. U.S. District Judge Amit Mehta declared, “Google is a monopolist, and it has acted as one to maintain its monopoly.” The ruling highlights Google’s extensive expenditure of tens of billions of dollars on exclusive contracts to secure its position as the default search provider on smartphones and web browsers, effectively stifling potential competitors (Apple alone received $20 billion in 2022). A separate proceeding will decide the penalties Google will face, and the company is expected to file an appeal. The judge now considers what remedies are needed to restore competition, a process that could drag out for months. One possibility is an injunction against Google’s search deals or a requirement that users affirmatively select the search engine they use, the Wall Street Journal reported.

— Yum Brands’ earnings indicate ongoing challenges due to lingering inflation effects. The company reported a larger-than-expected decline in same-store sales for the second quarter, primarily driven by lower-income consumers dining out less frequently. In the US, same-store sales at the KFC division fell by 5%, following a 7% decline in the first quarter. Conversely, the Taco Bell division saw a 5% increase in same-store sales. This growth in Taco Bell helped reduce the overall decline in same-store sales to 1%, an improvement from the 3% drop in the first quarter, though still steeper than market expectations.

— Ag markets today: Corn, soybeans and the winter wheat markets retreated from Monday’s gains during the overnight session. As of 7:30 a.m. ET, corn futures were trading 2 to 3 cents lower, soybeans were 15 to 16 cents lower and wheat futures were 3 to 4 cents lower. The U.S. dollar index was around 500 points higher, and front-month crude oil futures were trading just above unchanged this morning.

Cattle futures oversold. Heavy long liquidation in live cattle futures, including Monday’s fear-driven plunge, swung the market from overbought to short-term oversold in just six trading sessions. Monday’s mid-range close and filling of the opening gap suggests potential selling exhaustion, though a drop through yesterday’s low would likely trigger another leg lower.

Rally in cash hog index stalls. The CME lean hog index is down a nickel to $93.59 as of Aug. 2, ending a 15-day string of gains. After Monday’s losses, August lean hog futures stood at a $2.44 discount to today’s index quote.

— Agriculture markets yesterday:

• Corn: December corn rose 3 3/4 cents to $4.07, marking a one-week high close.

• Soy complex: November soybean futures rose 13 1/2 cents to $10.40 3/4 and closed on session highs. September meal futures rallied $5.00 to $338.70, closing on session highs. September bean oil futures slid 59 points to 41.09 cents and closed near the session’s mid-point.

• Wheat: December SRW wheat rose 1 cent to $5.63 1/4 and nearer the session high. December HRW wheat rose 1/2 cent to $5.76 3/4 and nearer the session high. September spring wheat futures sunk 7 1/2 cents to $5.87 1/2.

• Cotton: December cotton fell 47 points to 67.78 cents, a new-for-the-move low.

• Cattle: October live cattle fell $3.075 to $179.00, near mid-range and hit a 2.5-month low. October feeder cattle plummeted $7.35 to $239.225, nearer the session low and hit a nine-month low.

• Hogs: October lean hog futures skidded 85 cents to $75.725, though closed well off session lows. Nearby August futures sunk $1.05 to $91.15.

— Quotes of note:

• San Francisco Federal Reserve President Mary Daly expressed a measured outlook regarding the July jobs report and the likelihood of an impending recession. She indicated that a “policy adjustment” is anticipated soon and emphasized that there is no cause for alarm. Daly described the U.S. labor market as “slowing but not falling off a cliff,” despite the latest jobs report showing a smaller-than-expected gain of 114,000 nonfarm payrolls and an increase in the unemployment rate to 4.3%.

This rise triggered the Sahm Rule recession indicator, which suggests a recession begins when the three-month moving average of the unemployment rate exceeds its low from the prior year by at least half a percentage point. Daly attributed the higher unemployment rate to an increased supply of workers rather than permanent layoffs. Fed Chair Jerome Powell addressed the Sahm rule issue, labeling it more of a statistical event than an economic rule. “A statistical regularity is what I’d call it,” he observed. “It’s not like an economic rule where it’s telling you something must happen.”

She is monitoring signs of both a slowing labor market and potential inflation resurgence and mentioned that interest rates will need adjustment to maintain balance between these objectives.

The key question remains when and by how much the interest rate will be cut. Several important data releases are expected before the next Federal Open Market Committee meeting on Sept. 17-18, including August jobs data on Sept. 6, inflation data on Aug. 14 and 30, and the August Consumer Price Index (CPI) on Sept. 11.

• Chicago Fed President Austan Goolsbee, viewed as a monetary policy dove, indicated the market selloff that his Monday was in part fueled by the Bank of Japan’s decision last week to raise interest rates. “If the market moves give us an indication over a long arc that we’re looking at a deceleration of growth, then we should react to that,” Goolsbee said in an interview with CNBC. “As you see jobs numbers come in weaker than expected but not looking yet like recession, I do think you want to be forward-looking at where the economy is headed for (in) making the decisions.”

• AI spending to blame? “The technology sector has come under particular duress … amidst fear that companies are overspending on artificial intelligence infrastructure just as economic growth is beginning to slow.” — John Belton of Gabelli Funds, on Monday’s market selloff that included steep declines in shipping stocks.

— The U.S. international trade deficit narrowed to $73.1 billion in June 2024, a decrease from $75.0 billion in May. This reduction was driven by a significant increase in exports, which rose by $3.9 billion to $265.9 billion, while imports increased by $2.0 billion to $339.0 billion. The decrease in the trade deficit suggests a shift in the balance of trade, influenced by various economic factors.

Factors influencing the trade deficit:

1. Cooler domestic demand

There is evidence suggesting that domestic demand in the U.S. is cooling. The moderation in consumer spending and business investment has been noted as key factors. Consumer spending, which constitutes a significant portion of the GDP, has shown signs of slowing down. This is attributed to factors such as high inflation, rising interest rates, and a cooling labor market. As domestic demand cools, the need for imported goods may decrease, thereby reducing the trade deficit.

2. Moderating pace of consumer spending

Consumer spending has been decelerating, particularly in discretionary areas such as entertainment, travel, and dining out. This trend is expected to continue through the remainder of the year, especially among lower-income consumers who are more affected by inflation and interest rates. The reduction in consumer spending can lead to a decrease in imports, as there is less demand for foreign goods.

3. Business investment trends

Business investment has shown resilience despite higher interest rates. However, there are signs that the pace of investment is moderating. Factors such as higher borrowing costs and economic uncertainty may contribute to a slowdown in business investment. This can result in a reduced demand for imported capital goods and materials, further narrowing the trade deficit.

Implications for GDP growth: The narrowing of the trade deficit has implications for overall GDP growth. Net exports, which are the difference between exports and imports, can influence GDP. With cooler domestic demand and moderating consumer spending and business investment, imports are likely to ease, potentially turning net exports into a neutral or even positive factor for GDP growth. This shift can help offset some of the negative impacts of reduced domestic consumption and investment.

Market perspectives:

— Outside markets: The U.S. dollar index was firmer, with the euro and British pound weaker against the greenback. The yield on the 10-year U.S. Treasury note was firmer, trading around 3.84%, with a mixed tone in global government bond yields. Crude oil futures were around unchanged, with U.S. crude around $72.95 per barrel and Brent around $76.30 per barrel. Gold and silver futures are mixed, with gold firmer around $2,452 per troy ounce and silver weaker around $27.14 per troy ounce.

— Ag trade update: Japan is seeking 83,445 MT of milling wheat in its weekly tender. Egypt tendered to buy 30,000 MT of soyoil and 10,000 MT of sunflower oil —K all optional origin.

— Debby has weakened from a hurricane to a strong tropical storm as it moves through Florida, Georgia, and South Carolina this week. Since making landfall on Monday morning in Florida’s Big Bend region, the storm has claimed at least five lives in the Southeast U.S. Debby has brought more than a month’s worth of rain to Florida, leading to widespread evacuations and hazardous travel conditions. Rainfall totals are expected to reach at least a foot from northern Florida to southeastern North Carolina through Friday night. Coastal areas in South Carolina and Georgia could see as much as 30 inches of rain during the same period. USDA’s Crop Progress report Monday indicated little of the cotton crop where the rains are forecast to be heaviest have open bolls which make them more susceptible to damage from heavy rains and wind. State recaps noted producers were readying for the heavy rains that are forecast from Debby.

— Middle Eastern nations are on high alert for a potential escalation of the Israel-Hamas conflict following threats from Iran to avenge the killing of Hamas’ political leader, Ismail Haniyeh, in Tehran last week. Although Tehran and Hamas hold Israel responsible, Israel has not confirmed or denied involvement. To prevent further conflict, regional countries are engaging with Iran diplomatically to ease tensions. The U.S. has increased its preparedness to defend Israel against potential Iranian attacks. The Defense Department is also closely monitoring the safety of Americans in the region after several U.S. personnel were injured in a suspected rocket attack on Monday targeting U.S. and coalition forces at an airbase in Iraq. U.S. officials attributed the attack to Iran-aligned militia groups, describing it as a “dangerous escalation.”

— A second round of $300 million in funding is now available through the Regional Agricultural Promotion Program (RAPP) to boost U.S. food and agricultural exports to new markets, announced USDA Deputy Secretary Xochitl Torres Small on Monday. Allocations are expected by the end of the year, with applications due by Oct. 4.

The first round of RAPP funding, awarded to 66 organizations in May, underscores the program’s significance in supporting farm income and rural economic development. “Given the importance of exports in supporting farm income and rural economic development, we’re delighted to be able to make an additional $300 million available this year,” Torres Small stated.

On average, one-fifth of U.S. agricultural production is sold internationally, making exports crucial for farmers’ income. Senate Ag Chairwoman Debbie Stabenow (D-Mich.) highlighted the importance of strengthening trade opportunities for American farmers through RAPP, which invests in expanding new markets.

This fiscal year, U.S. food and agricultural exports are forecasted at $170.5 billion, the fourth highest ever, but down from the record $196.1 billion in 2022. The agricultural trade deficit is projected to be the largest-ever at $32 billion. USDA will release its first agricultural trade forecast on August 27.

Background. Established with $1.2 billion in 2023, RAPP aims to open and develop new markets beyond traditional customers. USDA also supports farm exports through the Market Access Program and Foreign Market Development program. The U.S. Meat Export Federation, a recipient of $21 million in the first round, emphasized the importance of RAPP’s focus on market diversification, noting that the funding is already aiding in identifying and developing new opportunities for U.S. pork, beef, and lamb exports.

— The Department of Energy (DOE) is appealing a federal court ruling that blocked its pause on new liquefied natural gas (LNG) export licenses. This appeal follows a preliminary injunction issued by U.S. District Judge James Cain in Louisiana on July 1. The injunction was in response to a lawsuit filed by 16 states challenging the administration’s decision to halt new LNG export approvals. Judge Cain criticized the administration’s action as “completely without reason or logic,” describing it as an “epiphany of ideocracy.” The injunction allows the states to continue their legal challenge against the Biden administration’s policy.

— The Department of Energy (DOE) is set to announce $2.2 billion in new investments for the power grid today. These investments, targeting transmission, storage, and distribution, will span 18 states and add nearly 13 gigawatts of grid capacity. Funded by the Grid Resilience and Innovation Partnerships (GRID) program created under the Infrastructure Law, this initiative follows a previous round of projects worth $3.5 billion announced last fall, with another round expected later this year. The most significant project involves a 3,000 megawatt high-voltage power line connecting the Eastern and Western power grid interconnections in Montana and North Dakota. Additionally, $600 million will be allocated to upgrade 100 miles of transmission lines in California, along with several other projects across multiple states.

— Today, Kansas, Michigan, Missouri, and Washington are holding primary races. Of particular interest to Democrats is the primary in Missouri, where Congresswoman Cori Bush, a member of the left-wing “Squad,” is facing a challenger supported by AIPAC, a pro-Israel group. Bush has been notable for being the first lawmaker to call for a ceasefire in Gaza. This race follows a similar recent development in June when Jamaal Bowman, a progressive congressman from New York, was ousted by an AIPAC-backed challenger. The outcomes of these primaries could significantly influence the political dynamics within the Democratic Party.

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