Russia warns West it can target commercial satellites | China’s Xi offers fig leaf
In Today’s Digital Newspaper |
Abbreviated dispatch today as I am en route back from California.
Global stock markets were mixed overnight. U.S. stock futures contracts tied to the three major indices rallied on Thursday as stronger-than-expected U.S. GDP figures eased concerns about an imminent recession. In Asia, Japan -0.3%. Hong Kong +0.7%. China -0.6%. India +0.4%. In Europe, at midday, London +0.4%. Paris -0.8%. Frankfurt -0.8%.
Firmer price tone this morning. Wheat futures built on Wednesday’s gains overnight amid global supply worries, while the corn and soybean markets followed to the upside. As of 7:30 a.m. ET, corn futures were trading 2 to 3 cents higher, soybeans were mostly 3 to 6 cents higher and wheat futures were 11 to 15 cents higher. Front-month crude oil futures were modestly firmer, while the U.S. dollar index was more than 300 points higher this morning.
More U.S. soybean sales to China with cotton sales cancellations. USDA’s weekly Export Sales update for the week ended Oct. 20 showed another round of soybean purchases by China, but the country cancelled purchases of U.S. cotton. Activity for 2022-23 included net sales of 157,802 tonnes of corn, 1,115,585 tonnes of soybeans, and net reductions of 49,917 running bales of upland cotton. For 2022, net sales of 2,625 tonnes of beef and 5,636 tonnes of pork were reported.
U.S. GDP accelerated at 2.6% pace in Q3, better than expected as growth turns positive. The US economy grew an annualized 2.6% on quarter in the three months to September of 2022, more than market expectations of 2.4% and rebounding from a contraction in the first half of the year. The growth in exports, consumer spending, nonresidential fixed investment, federal government spending, and state and local government spending, was partly offset by decreases in residential fixed investment and private inventory investment.
The apparent improvement, however, is largely the result of fluctuations in things like international trade, which don’t reflect the underlying health of the economy. They made GDP look artificially weak in the first half of the year, while pumping up the most recent figure. “If you take a step back and look at GDP, it’s gone effectively nowhere over the last year,” says Mark Zandi, chief economist at Moody’s Analytics. “One quarter or two it’s down a bit. This quarter it’s up a bit. But net-net, we’re kind of treading water.”
Bottom line: Slowing consumer spending and a rapidly weakening housing market mean the report will do little to ease fears of a looming recession.
New orders for the U.S. manufactured durable goods increased 0.4% month on month in September of 2022, following an upwardly revised 0.2% gain in August and beating market expectations for a 0.2% advance. New orders were up six of the last seven months. Excluding transportation, new orders decreased 0.5%. Excluding defense, new orders increased 1.4%. Transportation equipment, up five of the last six months, drove the increase, $1.9 billion or 2.1% to $95.4 billion.
ECB delivers second 75 bps rate hike. Rates are now at highest in more than a decade. The European Central Bank (ECB) raised its key interest rates by 75 bps during its October meeting, following a similar move in September and bringing borrowing costs to the highest since early 2009 as the central bank battles high inflation and a looming recession. The decision came in line with market forecasts.
The ECB announced it was changing the terms and conditions of its targeted longer-term refinancing operations, or TLTROs — a tool that provides European banks with attractive borrowing conditions, designed to incentivize lending to the real economy. “The Governing Council ... decided to adjust the interest rates applicable to TLTRO III from 23 November 2022 and to offer banks additional voluntary early repayment dates,” the ECB said. “In order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.”
Asia has a roughly $3.5 trillion problem on its hands as the Fed’s aggressive interest rate increases pushed 10-year U.S. Treasury yields to 4.1%, with 5% not far off. That lofty price tag represents the worth of U.S. Treasuries on which Asia’s central banks are sitting, with Japan and China holding the lion’s share at roughly $1 trillion each. The situation has some similarities to the region’s 1997–98 financial crisis, which manifested during severe Federal Reserve tightening. Link to more via Forbes.
Russia warns West: We can target your commercial satellites. A senior Russian foreign ministry official said that commercial satellites from the United States and its allies could become legitimate targets for Russia if they were involved in the war in Ukraine. Konstantin Vorontsov, deputy director of the Russian foreign ministry’s department for non-proliferation and arms control, told the United Nations that the United States and its allies were trying to use space to enforce Western dominance. Vorontsov, reading from notes, said the use of Western satellites to aid the Ukrainian war effort was “an extremely dangerous trend… “Quasi-civilian infrastructure may be a legitimate target for a retaliatory strike,” Vorontsov told the United Nations First Committee, adding that the West’s use of such satellites to support Ukraine was “provocative.”
Russia held its first nuclear drill since it invaded Ukraine, which simulated a retaliatory strike and was supervised by President Vladimir Putin via video link. Earlier President Joe Biden warned him that deploying tactical nuclear weapons would be an “incredibly serious mistake.” Separately, Ukraine’s government reported that 1,000 bodies had been exhumed in territories its armed forces liberated in the north-east of the country.
Russia: Extension of grain export deal depends on provisions of Russian exports. Russia on Thursday said that provisions of the Black Sea grain deal to ease Russian agricultural and fertilizer exports were not being met, and that Moscow was yet to decide on whether the agreement should be extended beyond the Nov. 19 deadline. Foreign Ministry Spokeswoman Maria Zakharova told reporters the West had not taken sufficient steps to ease sanctions to facilitate Russian exports.
China’s fig leaf. Chinese President Xi Jinping said his nation is willing to work with the U.S. to find ways to cooperate. Better communication between the two nations would bolster global peace and development, Xi said in a letter to the National Committee on U.S./China Relations’ annual dinner Wednesday, the official Xinhua News Agency reported. His comments come before a potential meeting with President Joe Biden at a Group of 20 summit next month.
Rishi Sunak, Britain’s new prime minister, delayed the announcement of a major economic plan, saying that he needed time to make the “right decisions.” Sunak is expected to announce tax increases and spending cuts to help balance a budget deficit. That will reassure investors but it will make it harder to put in place the kind of policies necessary to boost productivity and growth.
The Bank of Canada raised its main interest rate by a half-percentage point Wednesday, surprising investors who had expected a second straight 0.75-point move. The bank said in a statement it wanted to see how its rate increases have affected the overall economy before raising rates further. The bank also downgraded its growth estimates and pointed to higher borrowing costs as a reason.
Key Democrat warns Fed chairman. One of the Senate’s top Democrats, Sherrod Brown of Ohio, is warning Fed Chairman Jerome Powell that the Fed’s actions could lead to job losses. “It is your job to combat inflation, but at the same time you must not lose sight of your responsibility to ensure that we have full employment,” Brown wrote to Powell. The Fed is expected to announce another three-quarter-point rate hike at next week’s meeting, just days before the election.
Before economic data Thursday, CME Fed funds futures put the probabilities of a 75-basis-point increase at 90.3%, with a 50-basis-point rise at 9.7%.
Another railroad union rejects deal. Members of a third railroad union have rejected the White House-brokered deal on wages and work conditions reached with railroad companies in September, raising the possibility of a strike. Two of the largest unions involved are still in the process of ratification and should announce results in mid-November. A railroad strike, perhaps as soon as December, could add to supply-chain woes at the height of the holiday shopping season.
Bottom line: Union members of the National Brotherhood of Railway Signalmen overwhelmingly torpedoed the collective bargaining proposal Wednesday. The parties agreed to a status quo period until early December, preventing the unions from walking off the job, according to the National Carriers’ Conference Committee, which represents freight-rail companies. Five more unions are scheduled to vote on contract proposals by mid-November. A sixth union, the Brotherhood of Maintenance Way Employees, rejected the agreement earlier this month and is renegotiating terms.
Global demand for some fossil fuels could peak later this decade, according to the International Energy Agency (IEA). War in Ukraine and the resulting disruption in energy markets have realigned supply and demand. If government make good on policy goals they set as a result of the crisis, they would speed up the shift to renewables, the IEA said. The agency said natural-gas demand would plateau by the end of this decade while oil would peak in the 2030’s.
U.S. mulls boost to diesel fuel reserve. The Biden administration is mulling options to increase the Northeast Home Heating Oil Reserve which contains 1 million barrels of ultra-low sulfur distillate in four locations in New Jersey, Connecticut and Massachusetts, with Bloomberg citing unnamed sources saying two options would require congressional action — removing the statutory cap on how much can be in the reserve and requiring companies to hold minimum inventory levels. Limiting exports of diesel is another option, the report said, one that could be done via executive action. No decisions have been made.
Supplies of diesel are at their lowest level on record and some East Coast suppliers are starting to ration the fuel. This comes as exports of gasoline and diesel have increased with U.S. petroleum exports hitting a new record last week, according to the Energy Information Administration (EIA). The item noted that exports have risen due in part to Jones Act requirements that make it costly to ship fuels to the U.S. East Coast. The administration is already working on new rules that could allow them to boost emergency supplies of gasoline and diesel.
As Bloomberg’s Javier Blas writes (link), “such low levels are alarming because diesel is the workhorse of the global economy. It powers trucks and vans, excavators, freight trains and ships. A shortage would mean higher costs for everything from trucking to farming to construction.”
Retail prices have been steadily climbing for more than two weeks. At $5.324 a gallon, they’re 50% higher than this time last year, according to AAA data. Wholesale diesel prices in the spot market of New York harbor, a key pricing point, have surged this week to more than $200 per barrel. Excluding a brief interval from late April into mid-May, that would be a record high.
Europe is suddenly sitting on a glut of natural gas, sending prices lower and easing fears of winter fuel shortages and rationing as the continent weans itself off Russian energy.
Iowa now ranks second in the nation in excessive drinking, according to a new state report.
Another boost in projected GOP pickup of House seats from David Wasserman, House editor of the Cook Political Report with Amy Walter. “We’re increasing our outlook for House GOP gains from 10-20 seats to 12-25 seats as Democrats’ blue state problems grow. Plus, nine rating changes.” Link for details.
Another election predictor, Sabato’s Crystal Ball, writes: “218 seats at least Lean Republican, while 195 at least Lean Democratic, and there are 22 Toss-ups. Splitting the Toss-ups evenly, 11-11, would give Republicans 229 seats, or a net gain of 16. We suspect the Republicans will do better than just a split in the Toss-ups, so our updated forecast is a GOP gain in the high teens or low 20s.”
Election Day 2022 is 12 days away. Election Day 2024 is 741 days away.
KEY LINKS |
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 | Congress to-do list | SCOTUS on WOTUS | SCOTUS on Prop 12 | New farm bill primer |