Markets, Traders Coming Around to ‘Higher-for-Longer’ Regarding Interest Rates

Big boost for hybrid cars | Oil markets surge | Brazil investigates alleges China trade dumping

Jim Wiesemeyer

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March 18, 2024 08:45 AM

Big boost for hybrid cars | Oil markets surge | Brazil investigates alleges China trade dumping

Today’s Digital Newspaper

MARKET FOCUS

Brent oil gains on geopolitical unrest
Natural gas prices in Europe rise for 4th session
Apple in talks to let Google’s Gemini power some generative AI features on iPhone
De-dollarization at a glance
Eurozone achieves trade surplus of €11.4 billion, a significant turnaround
Ag markets today
Cocoa futures rose to fresh record in New York
Indonesia to pause corn imports
Ag trade update
NWS weather outlook
Pro Farmer First Thing Today items
Highlights of most recent Pro Farmer newsletter

CONGRESS

The week ahead
USDA report assesses impact of expiring Trump-era tax cuts on ag sector

RUSSIA & UKRAINE

Ukrainian naval success boosts grain exports, economy
Ukrainian Agriculture Ministry forecasts decrease in corn planted area for 2024

PERSONNEL

Three nominees to the Federal Energy Regulatory Commission will be reviewed

CHINA

China industrial output, retail sales beat estimates
China’s fixed-asset investment surged by 4.2% year-on-year in Jan.-Feb. 2024
China’s pork imports slump to start 2024

TRADE POLICY

Brazil launches investigations into alleged dumping of industrial products by China

ENERGY & CLIMATE CHANGE

North Dakota pipeline regulators to discuss Summit Carbon Solutions project

MARKET FOCUS

— Equities today: Asian and European stock markets were mixed in overnight trading. U.S. Dow opened around 130 points higher. The Nikkei 225 share index rose by more than 2% as the Bank of Japan began discussing an end to the country’s negative interest-rate policy. In Asia, Japan +2.7%. Hong Kong +0.1%. China +1%. India +0.1%. In Europe, at midday, London +0.1%. Paris flat. Frankfurt +0.3%.

U.S. equities Friday: All three major indices finished Friday with losses and posted weekly declines. The Dow was down less than 0.1%, the Nasdaq fell 0.7%, and the S&P 500 declined 0.1%. On Friday, the Dow lost 190.89 points, 0.49%, at 38,714.77. The Nasdaq fell 155.36 points, 0.96%, at 15,973.17. The S&P 500 was down 33.39 points, 0.65%, at 5,117.09.

— Apple is in talks to let Google’s Gemini to power some generative AI features on the iPhone, reports note. A deal would give the controversial tool billions of users, but may also signal that Apple isn’t making much progress with its own AI. Apple has more than 2 billion devices in active use that could potentially become home to Google Gemini later this year. But a partnership between the two Silicon Valley giants would also likely draw the eye of regulators, says Bloomberg.

— Ag markets today: Corn and wheat futures posted mild gains amid corrective buying overnight, while soybeans weakened following earlier strength. As of 7:30 a.m. ET, corn futures were trading fractionally higher, soybeans were 7 to 8 cents lower, SRW wheat was 6 to 7 cents higher, HRW wheat was 4 to 5 cents higher and HRS wheat was 3 to 4 cents higher. Front-month crude oil futures were modestly firmer, while the U.S. dollar index is mildly weaker.

Cash cattle, wholesale beef strengthen. Cash cattle prices firmed last week, potentially challenging the record high from mid-2023. Wholesale beef prices also firmed, with Choice up $1.12 and Select 71 cents higher on Friday. Choice beef is at the highest price since September 2023, while Select reached the highest level since June of last year.

Cash hog index and pork cutout continue seasonal climbs. The CME lean hog index is up 15 cents to $82.34 as of March 14. After strong gains on Friday, April lean hog futures held a $4.585 premium to today’s cash quote, suggesting traders expect seasonal strength to continue over the next month. The pork cutout value firmed 22 cents on Friday to $93.47 as strong gains in butts and loins offset declines in other cuts.

— Agriculture markets Friday and for the week:

Corn: May corn futures ended 3 cents higher at $4.36 3/4 but marked a 3-cent loss on the week.
Soy complex: May soybeans rose 3 cents to $11.98 1/4, notching the highest close since Feb. 8 and a 14 1/4 cent gain on the week. May soymeal fell $2.70 to $334.70 and lost $6.70 week-over-week. May soyoil rose 101 points to 49.92 cents and rallied 325 points from a week ago.
Wheat: May SRW futures settled 3 3/4 cents lower at $5.28 1/2, marking an 8 1/4 cent loss on the week. May HRW futures dropped 8 1/2 cents to $5.66 1/4, losing 12 1/2 cents on the week. May spring wheat fell 8 3/4 cents to $6.46 1/2 and lost 16 1/4 cents from a week ago.
Cotton: May cotton rose 46 points to 93.94 cents but gave up 133 points on the week.
Cattle: Cattle futures rebounded from Thursday’s big losses, with nearby April live cattle rising 30 cents to $187.25. That represented a weekly decline of 35 cents. Meanwhile, expiring March feeder futures surged $1.80 to $249.275 and most-active April climbed 95 cents to $252.125. The latter quote marked a weekly drop of $1.975.
Hogs: Hog futures ended the week on a strong note, with nearby April leading the way higher. It jumped $1.90 to $86.925. That represented a weekly gain of $2.55. The cash hog market exhibited sustained strength this week, with the hog index officially adding 17 cents to reach $82.19 when Wednesday’s official quote was released Friday morning.

— Quotes of note:

A new FT-Chicago Booth poll found that two-thirds of those surveyed believe the Fed will make two or fewer interest rate cuts this year as the U.S. central bank struggles to complete the “last mile” of its battle with inflation. The most popular response for the timing of the first cut was split between July and September. That is a later start than expected in financial markets, where traders expect three cuts this year, with the first quarter-point reduction from the current 23-year high of 5.25 to 5.5 per cent coming in June or July.
Of note: Bond investors who were once convinced the Fed would start cutting rates this week are painfully surrendering to a higher-for-longer outlook. Treasury yields are on the cusp of setting new highs as data continues to point to persistent inflation. Investors are now set up for fewer cuts, with worries the Fed may signal an even shallower easing cycle.
LBBW analysts: Credit markets unfazed by delayed rate cuts amid positive economic outlook. LBBW analysts note that despite stronger-than-expected economic data in the U.S. and Europe leading central banks to postpone interest rate cuts, credit markets remain unfazed. According to the analysts, credit markets are adopting a relaxed stance towards the diminishing probability of immediate key interest rate reductions. They anticipate major central banks to initiate rate cuts in the near future, given the positive economic outlook in both regions. LBBW asserts that these factors support the credit markets, maintaining an overall positive outlook for credits.
“I think what he said is totally inappropriate.” — Israeli Prime Minister Benjamin Netanyahu, responding to comments from Senate Majority Leader Chuck Schumer (D-N.Y.) calling for new elections in Israel. Schumer, who is normally a staunch supporter of Israel, called Netanyahu a “major obstacle to peace.”
Conferences: Nvidia chief Jensen Huang gives the keynote speech at the chipmaker’s annual developer conference in Silicon Valley. CERAWeek, the global energy conference sponsored by S&P Global, begins today in Houston, with guest speakers including the chair and chief executive of ExxonMobil Darren Woods. Other speakers this morning: Aramco’s Amin Nasser, TotalEnergies’ Patrick Pouyanne, Shell’s Wael Sawan, Petrobras’ Jean Paul Prates, Woodside Energy Group Ltd.’s Meg O’Neill. Afternoon appearances: Gunvor Group Chairman Torbjörn Törnqvist, U.S. Energy Secretary Jennifer Granholm, White House energy adviser Amos Hochstein and climate adviser John Podesta, Trafigura Group CEO Jeremy Weir, Sen. Joe Manchin (D-W.Va.).

— De-dollarization: Since 2001, which marked the start of an era in which U.S. governments sharply expanded the use of economic sanctions, the greenback’s share of global foreign exchange reserves held by central banks dropped from 73% to 59%, according to the International Monetary Fund. Gulf nations are starting to settle oil trades in the Chinese yuan, and other commodity producers are considering similar shifts. Still, the U.S. dollar is on one side of 90% of currency transactions worldwide, and two-thirds of international debt is denominated in dollars. Global commodity markets, such as that for oil, are ruled by the dollar. Those who think the dollar will be challenged in the years ahead usually cite these reasons: The rise in U.S. government debt (every 100 days the debt grows by $1 trillion), the dysfunctionality of policymaking in Washington and the weaponization of the dollar through the aggressive use of financial sanctions.

— In January 2024, the Eurozone achieved a trade surplus of €11.4 billion, a significant turnaround from the deficit of €32.6 billion recorded in the same period the previous year. Exports increased by 1.3% year-on-year to €225.9 billion, driven by higher shipments of miscellaneous manufactured articles (+3.3%), manufactured goods (+1.2%), chemical products (+3%), and machinery & transport equipment (+1.5%). Notably, exports rose notably to the US and Switzerland but declined to Russia, China, and Norway, among the main trading partners. On the other hand, imports fell by 16.1% to €214.5 billion, largely due to a substantial decrease in purchases of mineral fuels, lubricants, and related products (-36.4%).

Meanwhile, in February 2024, the consumer price inflation rate in the Eurozone remained steady at 2.6% year-on-year, marking the lowest rate in three months but still surpassing the European Central Bank’s target of 2%. Energy prices experienced a lesser decline of 3.7% compared to January’s -6.1%, while the pace of price increases moderated for both food, alcohol & tobacco (3.9% versus 5.6%) and non-energy industrial goods (1.6% versus 2.0%). Conversely, services inflation remained unchanged at 4.0%. The core inflation rate, excluding volatile food and energy prices, also stayed consistent at 3.1%, hitting its lowest point since March 2022. On a monthly basis, consumer prices rose by 0.6% in February, rebounding from a 0.4% drop in January.

Of note: European banks must brace themselves for rising insolvencies, greater geopolitical risks and upheaval in energy-intensive industries, the Eurozone’s new chief banking supervisor warned. Claudia Buch, who became chair of the European Central Bank’s supervisory arm in January, said an increase in the benchmark interest rate to a record high of 4% “still has to filter its way through the financial system.”

Market perspectives:

— Outside markets: The U.S. dollar index was weaker, with the euro and British pound both firmer against the greenback. The yield on the 10-year U.S. Treasury note was lower, trading around 4.31%, with a mostly lower tone in global government bond yields. Crude oil futures remained higher ahead of U.S. market action, with U.S. crude around $81.50 per barrel and Brent around $85.75 per barrel (see related item below). Gold and silver futures were narrowly mixed, with gold higher around $2,164 per troy ounce and silver weaker around $25.38 per troy ounce.

— European natural gas futures surged by around 8% on Monday, nearing €29/MWh, marking the fourth consecutive session of gains and hitting the highest level since early February. The spike was driven by mounting concerns over supply shortages. Repairs at the Freeport LNG terminal in Texas resulted in reduced flows, with ongoing work expected until April. Additionally, Ukrainian attacks on Russian refineries, anticipated low wind power in north-west Europe, and increasing demand in Asia further contributed to market anxieties. Despite these factors, the end of the heating season in Europe, stable production from Norway, the growing presence of solar power, and European gas inventories remaining at approximately 59% capacity have somewhat mitigated the surge in gas prices.

— Brent crude futures surged towards $86 per barrel on Monday, reaching their highest level since early November. This uptrend continued from the previous week, fueled by growing geopolitical tensions that heightened concerns about oil supply. Ukraine intensified drone strikes on Russian oil refineries, resulting in an estimated 7% reduction in Russian refining capacity for the first quarter, as per Reuters analysis. Additionally, Israeli Prime Minister Benjamin Netanyahu’s announcement of plans to advance into Gaza’s Rafah enclave further dampened prospects for a peace agreement, adding to geopolitical uncertainties. Investors are closely monitoring monetary policy decisions from major central banks this week for indications regarding the timing of potential interest rate adjustments. Last week, oil prices climbed nearly 4%, propelled by the International Energy Agency’s optimistic demand forecast and its prediction of a slight deficit for the current year.

— Cocoa futures rose to a fresh record in New York. Prices have doubled in less than three months, boosting candy costs for consumers and sending chocolate makers scouring for supply.

— Indonesia to pause corn imports. Indonesia will pause corn imports as domestic output has started to rise with the beginning of what authorities expect to be a bumper harvest, which is already helping stabilize prices, officials said. Indonesia estimates its corn production will rise 10.3% to 5.34 MMT. Food procurement firm Bulog had been allocated a corn import quota of 500,000 MT this year on top of the 500,000 MT allotted for the last three months of 2023, some of which is set to arrive this year. But authorities want to prioritize purchases from local farmers, National Food Agency (NFA) deputy chief Andriko Noto Susanto told a government meeting.

— Ag trade update: South Korea purchased 125,000 MT of feed wheat – 65,000 MT to be sourced from the U.S. and 60,000 MT to be sourced from optional origins. Separately, South Korea purchased between 60,000 and 65,000 MT of optional origin feed wheat. Algeria tendered to buy a nominal 50,000 MT of soft milling wheat. Egypt tendered to buy 50,000 MT of optional origin raw cane sugar.

— NWS weather outlook: A few rounds of lake effect snow forecast downwind of the Great Lakes over the next few days... ...Cold morning temperatures bring a frost/freeze risk to parts of the Mid-South and Southeast on Tuesday... ...Record breaking warmth continues across the Pacific Northwest and northern Great Basin.

Items in Pro Farmer’s First Thing Today include:

• Corn and wheat firmer, beans weaker overnight
• Cold U.S. temps early this week, mixed bag for South America
• Ukraine corn planting to fall 4.5%

— Some highlights of most recent Pro Farmer newsletter (link to subscribe; a subscription gives you access to profarmer.com which includes searchable copies of Updates, plus commentary on markets in the morning, midday and evening, all sent to your email):

Brazil’s crop estimates: There is a significant variance between the crop estimates provided by the USDA and Conab for Brazil. This difference in estimates can have an impact on prices and export forecasts.
Changes to China’s soy demand calculations: The USDA has started using global exporters’ data to estimate China’s soybean imports due to discrepancies between shipping figures and Chinese customs data. This adjustment has led to an increase in China’s soybean import estimates.
Carbon intensity and its impact on agriculture: Carbon intensity (CI) is becoming a key focus for farmers, with the potential for lower CI scores to qualify for premiums from ethanol/biofuels plants. This could incentivize farmers to implement climate-smart practices and reduce emissions.
Ethanol production and corn demand: Ethanol production is at a record pace, leading to higher corn-for-ethanol use.

CONGRESS

— Key issues this week:

Second package of fiscal year (FY) 2024 budget bills has a deadline of midnight March 22. Negotiations continue, including a full-year FY 2024 Homeland Security appropriations bill, after last-minute negotiations. Text of the package will not come until Monday at the earliest.
House Ag panel hearing Wednesday on “The Danger China Poses to American Agriculture.”
USDA Secretary Tom Vilsack testifies Thursday before the House Ag Appropriations Subcommittee on the FY 2025 budget request for the Department of Agriculture.
Supreme Court considers whether White House efforts to suppress Covid-era social media posts crossed a line.

Link to The Week Ahead which was released on Sunday.

— Expiration of Trump-era tax breaks in 2025 set to significantly increase federal tax liabilities for farmers, according to USDA economists (link). The expiration will affect various aspects including reduced income tax rates, increased standard deduction, capped deduction for state and local taxes, and elimination of the personal exemption, resulting in an estimated combined impact of $4.5 billion.

The changes are expected to affect 97.6% of family farms, with the largest farms facing the greatest income tax liability increases in dollars.

Another substantial impact would stem from the expiration of the qualified business income deduction, affecting around 45% of farm households.

Additionally, the estate tax exemption is slated to decrease from $11.18 million to $6.98 million, potentially doubling the amount paid in federal estate taxes to $1.2 billion.

The report also discusses the potential effects of reviving and making permanent the child tax credit, which expired in 2021.

RUSSIA/UKRAINE

— Ukrainian naval success boosts grain exports, economy. The central Ukrainian village of Oleksandr Kosenyuk and other farmers are experiencing an unexpected surge in grain exports, thanks to Ukrainian naval drones successfully neutralizing Russian warships in the Black Sea. This military success has created a safe corridor for shipping from main ports like Odesa, boosting grain exports close to prewar levels, the Wall Street Journal reports (link).

The increased export income is injecting vitality into the economy, which suffered significant losses during the initial stages of the conflict.

Grain exports more than doubled in December compared to September, potentially adding $3.3 billion to exports this year and boosting economic growth by 1.2 percentage points. Before the invasion, Ukraine was a top-five global grain exporter, but shipments were disrupted by Russian naval activity near Odesa.

Previous hurdles. Although a deal brokered by Turkey and the United Nations allowed some grain shipments from July 2022, they faced significant delays due to inspections by Russian officials. Alternative export routes were costly and slow, exacerbating the situation for farmers.

In response to these challenges, Ukraine initiated strikes on Russian naval assets from August onwards, significantly weakening the Russian Black Sea Fleet. Utilizing naval drones and cruise missiles, Ukraine targeted Russian warships and facilities, effectively limiting Russian Navy movements in the Black Sea and creating space for commercial shipping, particularly grain exports from Odesa.

This military success has showcased Ukraine’s power and resilience, with ships now hugging the coasts of NATO member countries to minimize the risk of Russian interference. The Ukrainian government has collaborated with international insurers to ensure affordable insurance coverage for commercial vessels, further facilitating shipping.

Despite these positive developments, challenges remain, including ongoing attacks on Odesa and logistical hurdles that affect profitability for farmers and exporters. However, the influx of cash from increased exports is enabling investments in both agricultural projects and support for the armed forces.

Bottom line: The success in securing the Black Sea and revitalizing grain exports represents a significant achievement for Ukraine amidst the ongoing conflict.

— Ukrainian Agriculture Ministry forecasts a decrease in the corn planted area for 2024, estimating it at 3.863 million hectares (9.55 million acres), down by 4.5% from 4.043 million hectares in 2023. Additionally, they anticipate reductions in the planted area for spring wheat and sunflowers, while expecting a slight increase for spring barley and a significant rise for soybeans. The initial outlook suggests 5.292 million hectares of sunflowers (slightly less than the 5.308 million in 2023), 0.204 million hectares of spring wheat (down from 0.280 million in 2023), 0.943 million hectares of spring barley (up from 0.822 million in 2023), and 2.199 million hectares of soybeans (a notable increase from 1.780 million in 2023).

PERSONNEL

— Three nominees to the Federal Energy Regulatory Commission will be reviewed at a Thursday Senate Energy and Natural Resources Committee hearing.

CHINA UPDATE

— China industrial output, retail sales beat estimates. China’s industrial production surged by 7.0% year-on-year during January-February 2024, outpacing December 2023’s growth of 6.8% and surpassing market expectations of 5%. This marked the quickest growth in nearly two years, primarily fueled by strong performances in manufacturing (7.7% compared to December’s 7.1%) and utilities (7.9% compared to 7.3%), although mining saw a slight decline (2.3% versus 4.7%). Specific sectors such as computer and communications (14.6% versus 9.6%) and textile (6.6% versus 2.1%) experienced notable accelerations in production. However, coal mining and washing (1.4% versus 5.8%), oil and natural gas mining (3.0% versus 3.5%), non-ferrous metals (12.5% versus 12.9%), chemicals (10.0% versus 11.0%), general equipment (4.1% versus 4.6%), electrical machinery (4.6% versus 10.1%), and cars (9.8% versus 20.0%) displayed a slowdown in growth compared to previous figures.

Month-on-month, industrial output saw a 0.56% increase.

For the entirety of 2023, industrial output grew by 4.6%.

— China’s fixed-asset investment surged by 4.2% year-on-year in January-February 2024, surpassing market expectations of 3.2%. The secondary sector saw accelerated investment growth at 11.9%, up from 9.0% in December, driven by expansions in electricity, heat, gas, water (25.3%), and mining (14.4%). Investment in the tertiary sector also rose notably by 1.2%, a significant improvement from the previous gain of 0.4%, propelled by robust growth in railway transportation (27.0%), road transportation (8.3%), and water conservancy management (13.7%). In contrast, investment in the primary sector experienced a steeper decline at -5.7% compared to -0.1% previously. Additionally, investment in real estate contracted by an annual rate of 9.4% during the initial two months of the year, although this was a slight improvement from the preceding period’s plunge of 9.6%.

— China’s pork imports slump to start 2024. China imported 160,000 MT of pork during the first two months of this year, down 56.7% from the same period last year. The sharp drop in imports comes as China’s pork production reached the highest level since 2014 last year.

TRADE POLICY

— Brazil investigates China dumping amidst surging imports; trade tensions escalate. Brazil’s industry ministry has initiated several investigations into alleged dumping of industrial products by China amidst concerns over a surge in cheap imports, the Financial Times reports (link/paywall). Over the past six months, the ministry has opened probes on products like metal sheets, pre-painted steel, chemicals, and tires, prompted by requests from industry bodies. This move coincides with global anticipation of increased exports from China due to excess capacity, a property sector slowdown, and weak domestic demand.

China’s exports have seen a significant rise, especially to countries like Brazil, Vietnam, Thailand, Malaysia, and Indonesia. Notably, China’s steel exports to Brazil have increased, prompting concerns in the Brazilian steel industry. The Brazilian government is considering imposing tariffs on imported steel products, as steel imports from China have risen from $1.6 billion in 2014 to $2.7 billion in the past year. This is a sensitive issue for Brazil, being one of the world’s largest exporters of iron ore, a key ingredient in steel production.

Other products such as chemicals and tires have also seen a surge in imports from China, leading to separate investigations by the industry ministry. Similar concerns have been raised in other emerging markets like Thailand and Vietnam, where governments have launched investigations into dumping practices by Chinese companies.

In response to these trade tensions, various countries have taken measures. For example, Mexico imposed tariffs on imports of hundreds of goods from countries without free trade agreements, with China being one of the most affected. These actions have been accompanied by criticism from the Chinese government, which denounces what it sees as protectionist policies, particularly from the U.S. and the EU.

Of note: The trade tensions between Brazil and China present a dilemma for Brazilian President Luiz Inácio Lula da Silva. Lula aims to maintain friendly relations with Beijing while protecting and developing Brazil’s national industries. Since returning to the presidency for a third term, Lula has prioritized industrial policy. However, Brazil is also keen to avoid a confrontation with China, its largest trading partner. China purchases significant amounts of commodities from Brazil, such as soybeans and iron ore. In 2023, Brazil exported over $104 billion worth of goods to China, while importing $53 billion. Notably, 70% of the 101 million metric tonnes of soybeans shipped from Brazil last year, valued at around $39 billion, were destined for China.

ENERGY & CLIMATE CHANGE

— North Dakota pipeline regulators to discuss Summit Carbon Solutions project. North Dakota pipeline regulators will convene on Monday to determine a schedule for hearings regarding the Summit Carbon Solutions pipeline project, according to North Dakota Monitor. The agenda also includes a request to reconsider a previous decision on pipeline zoning ordinances.

Summit Carbon Solutions seeks a permit for a pipeline to transport carbon emissions from ethanol plants in five states to North Dakota for underground storage in Mercer and Oliver counties. The company has reapplied after the Public Service Commission (PSC) denied its initial application last year.

Changes to the route, including a wider berth around Bismarck, have been made to address the concerns of the commission. Summit claims the pipeline will reduce greenhouse gas emissions, benefit ethanol plants, and support farmers. However, it faces resistance from landowners and county governments, with Emmons and Burleigh counties passing ordinances with stricter restrictions. The PSC had previously sided with Summit on the issue of zoning laws but is now considering a reconsideration request from Burleigh County. The agenda also includes discussions on scheduling and location for a rehearing on the permit. The project, which has expanded to include over 50 ethanol plants, has encountered delays and is behind its original schedule for construction and operation.

KEY LINKS

Policy Updates