USDA Reports Wednesday Vie with Gas Prices Today as Key Focus

SCOTUS on Tues. takes up Prop 12 case | Inflation reports Wed. and Thurs.

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October 09, 2022 01:13 PM

SCOTUS on Tues. takes up Prop 12 case | Inflation reports Wed. and Thurs.

Washington Focus

Gas prices, another important ag sector Supreme Court case and key economic and agriculture reports highlight the week ahead. On the international front, the IMF and World Bank host their annual meetings in Washington this week (with key IMF reports released Tuesday), while next Sunday, Oct. 16, the Chinese Communist party begins its five-yearly congress during which President Xi Jinping is due to secure a historic third leadership term.

Prop 12 on Oct. 11. A second big ag sector Supreme Court case comes Tues., Oct. 11, involving California’s Proposition 12 requirements for animal housing, in particular sows. California regulators are currently training inspectors to disperse across the country to enforce California’s rules. Out

Background. The U.S. Supreme Court (SCOTUS) will hear National Pork Producers Council (NPPC) v. Ross, a challenge to a California law that seeks to reduce cruelty to animals by requiring that pork sold in the state come from breeding pigs housed in spaces that allow them to move around freely. The law forbids the sale of most pork in California unless the pig it comes from was born to a sow that was housed with 24 square feet of space.

NPPC and the American Farm Bureau Federation presented oral arguments that California’s 2018 ballot measure violates the U.S. Constitution’s Commerce Clause, which grants Congress the power to regulate trade among the states and restricts states from regulating commerce outside their borders. Because more than 99% of the country’s sows live outside of California and the state accounts for nearly 15% of the domestic pork market, NPPC says Prop 12 would have the effect of dictating the pork production practices of hog farmers in other states.

The dormant commerce clause provides an exception for moral imperatives, Prop 12 proponents note. Also, some key players have conceded they can supply all of California’s needs with existing crate-free capacity. While U.S. pork industry officials disagree, some economists in a separate pleading to the court have concluded the impact on the industry to be negligible.

The Biden administration is backing NPPC and AFBF.

When will SCOTUS ruling come? The mean time from oral argument to decision is 83.6 days (the median is 75), with a standard deviation of 46.2. This holds for 99% of the cases. Only reargued cases are held over. So there is no set timing rule, but SCOTUS generally releases the majority of its decisions in mid-June, just before the end of the term.

The White House and congressional Democrats are clearly worried about the recent uptick in gasoline prices. The Biden administration is attempting to downplay OPEC’s latest round of cuts while contemplating an escalatory response. “We are looking at alternatives,” President Biden told reporters Thursday. “We haven’t made up our minds yet.”

A rise in crude oil prices is largely behind the recent development, as crude oil prices rose nearly 17% this past week as the world’s major oil producers agreed to cut production, but analysts note two new factors that are also pushing gasoline higher — a loss of refining capacity in California and Ohio, and rising demand in recent weeks. Among the West Coast refineries that have shut down is one in Washington State run by Phillips 66 and two near San Francisco that are run by Valero and Chevron. A fire at a BP-owned refinery near Toledo, Ohio, shuttered that facility in September. It may not reopen until early 2023, Bloomberg News reported late last month. The national average price of regular gasoline stood at $3.910 a gallon on Sunday, climbing for more than two weeks, according to data from AAA (link). While analysts don’t expect drivers to enter the winter season with $5-per-gallon gas, prices are likely to rise further

National Economic Council (NEC) Director Brian Deese suggested Biden’s options could include instituting an export ban on American oil, suspending U.S. security support for Saudi Arabia, and supporting the Senate’s so-called “NOPEC” bill. That legislation would revoke the sovereign immunity of all OPEC members, including Russia, and allow the Justice Department to target oil companies in those countries for operating as monopolies. The White House previously opposed the bill when it advanced out of committee shortly after the outbreak of war in Europe.

Deese ratcheted up pressure on domestic oil companies to pass on savings to consumers. “In the very near term, what we believe needs to happen, consistent with market principles, is that the energy companies need to reduce retail prices to reflect the price that they’re paying for the wholesale gas,” Deese said. “The reason why wholesale gas prices continue to be at that level is because of all of the progress that we’ve made.”

At the state level, California Democratic Gov. Gavin Newsom announced Friday his plan to call a special session of the state legislature to consider implementing new taxes on oil companies in the face of historically high gas prices. California prices remain roughly $2.50 per gallon above the national average and at $6.335 as of Sunday, close to the state’s June record of $6.44. Newsom said Friday night that the session would begin Dec. 5, one month after the midterm elections, and could potentially seek to implement new profit taxes on U.S. oil companies selling in California. “Nothing justifies these outrageous and unconscionable prices,” Newsom said Friday. “This is just price gouging… “They can’t get away with it. They’re fleecing you. They’re taking advantage of you, every single one, every single day. Hundreds of millions of dollars a week they’re putting in their pockets,” he continued. The Western States Petroleum Association branded Newsom’s proclamation a “political stunt,” claiming that “if this was anything other,” then he “wouldn’t wait two months and call the special session now, before the election… This industry is ready right now to work on real solutions to energy costs and reliability if that is what the Governor is truly interested in,” the group wrote in a statement. Newsom is frequently touted as a potential Democratic primary challenger to President Joe Biden in the 2024 election.

What the White House is reviewing. “Nothing is off the table” when it comes to responding to OPEC+’s decision to cut oil production by 2 million barrels per day, the White House said. “We are looking at alternatives,” President Biden said. “We haven’t made up our minds yet.” On Friday Biden said: “I realize costs are going up on food, and I was able to bring gasoline down well over $1.60, but it’s inching up because of what the Russians and the Saudis just did. I’m not finished with that yet.”

Some of the options:

Additional SPR releases: Since March, Biden has released 155 million barrels from the Strategic Petroleum Reserve into the market, with sales for another 10 million barrels extended through November. The Treasury Department estimated in July that the SPR sales, in coordination with the 60 million barrels released by the International Energy Agency, lowered U.S. gas prices by around 38 cents per gallon. But there are limits to further releases, including that, at some point, they could pose a risk to national security.
NOPEC legislation: Senate Majority Leader Chuck Schumer (D-N.Y.) could bring to the floor the No Oil Producing and Exporting Cartels Act, or NOPEC — the long-stalled bill that would allow the U.S. gov’t to sue OPEC and OPEC+ producers for violating antitrust laws and trying to control oil production. The Senate Judiciary Committee voted in May, 17-4, to advance the bill to the floor for a full vote, but it was never called, and concerns remained that Biden might not sign it into law. At the time, the White House had expressed concerns about “unintended consequences” that NOPEC might have on the global energy market.
Export restrictions: The Department of Energy (DOE) said it will “consider all options” to ensure domestic inventories in the months ahead. Last week, Bloomberg reported that White House officials asked the DOE to analyze the impacts of an export ban or restriction on U.S. oil and gas producers. The restrictions would prohibit domestic producers from selling their supplies to other markets at higher prices. But the highly controversial step risks backfiring, disrupting markets even further and cratering key U.S./EU relationships at a critical time for the bloc. Industry leaders urged DOE in a letter to explicitly rule out such a possibility.
Tax holiday: In July, Biden floated the idea of a three-month federal gas tax holiday —which was shot down following opposition from economists and lawmakers in Congress. Members from both parties noted it would do little to address the root cause of the problem, do little to decrease prices for consumers, and would also cut into critical funding for the Highway Trust Fund, which is financed by the federal gas tax.
Industry pricing. “The wholesale price, the price that the gas station companies are paying for that gas, notwithstanding the fact that oil prices have come up with it, is still historically low compared to the retail price that they’re charging at the pump,” NEC’s Deese said. “So that’s one place where there is more opportunity.” “In the very near term, what we believe needs to happen, consistent with market principles, is that the energy companies need to reduce retail prices to reflect the price that they’re paying for the wholesale gas,” Deese explained. “The reason why wholesale gas prices continue to be at that level is because of all of the progress that we’ve made.”
Pressuring industry: The administration has called on U.S. oil and gas companies to ramp up domestic production to help bolster supply, though those efforts have not been met with much success, as analysts and industry officials note that ramping up capacity to the extent needed would require “years,” as well as hefty investment — which has been upended by regulatory uncertainty. Also, Republicans and oil industry officials say the calls to increase production are incongruent with the administration’s broader positions on fossil fuels, including its efforts to scale up clean energy and production from renewable sources, such as wind and solar. Instead, Biden and Democrats have put pressure on the industry through other means, including by calling for a Federal Trade Commission investigation into anticompetitive behavior and holding hostile congressional hearings.

A new national monument? The White House says President Joe Biden will travel to Colorado on Wednesday, Oct. 12. While there has been no official announcement, he will reportedly designate Camp Hale, a World War II training site along the Continental Divide, as a national monument. It would be the first national monument designated by President Biden.

The House select committee investigating the Jan. 6, 2021, Capitol Hill riot will hold its next public hearing Thurs., Oct. 13, at 1 p.m. ET. The committee had to reschedule this hearing, which was originally set for the end of September, because of Hurricane Ian. This will be the panel’s 10th hearing since it formed — and could be the last hearing until after the midterm elections. But a summary report has been rumored to be released ahead of Nov. 8 elections. Hmmm

Axios will host “A Global Look at Energy Reliability, Independence & the Environment” in Washington, D.C., on Tuesday. Speakers include David M. Turk, deputy secretary of the Department of Energy. The discussion also includes Neil Chatterjee, the former Federal Energy Regulatory Commission chair, and a segment with Toby Rice, CEO of EQT Corp., one of the largest shale gas producers in the United States.

On the geopolitical front, French President Macron chided President Biden for warning of nuclear ‘Armageddon.’ “I have always refused to engage in political fiction, and especially … when speaking of nuclear weapons,” the French leader said. “On this issue, we must be very careful.”

Meanwhile, Wall Street Journal columnist Walter Russell Mead analyzes (link) what brought Russia and the world to this point, including ineffective deterrence from the Biden administration. “Mr. Biden must bar the door to using nuclear weapons before he can seek a path to peace,” he writes. “Mr. Putin hopes the political shock waves set off by nuclear explosions in Europe would shatter the West’s resolve to support Ukraine. Is Germany willing to lose Berlin to save Kyiv? Are Americans ready to risk New York to keep Odessa free? These are the questions Mr. Putin is asking himself. The future of the world may depend on his answers.”

In a major blow for Russian President Vladimir Putin, a huge explosion early Saturday severely damaged the only bridge connecting the annexed Crimean Peninsula with the Russian mainland, crimping a key supply route for Moscow’s faltering war in Ukraine. Kyiv didn’t claim responsibility for the attack, though senior Ukrainian officials celebrated it on social media. Meanwhile, on Saturday, Ukraine used Himars rockets to destroy a railway hub used by the Russian military in the southern part of the Donetsk region, which could have served as another resupply route to the occupied south.

“This incident will likely touch President Putin closely; it came hours after his 70th birthday, he personally sponsored and opened the bridge, and its construction contractor was his childhood friend, Arkady Rotenberg,” the U.K. Ministry of Defense tweeted. Putin celebrated the opening of the nearly $4 billion bridge in 2018 by driving a dump truck across a 12-mile section even as international powers condemned its construction as violation of international law and rejected Russia’s claims to Crimea. More on this in Monday’s News/Markets/Policy Updates.

China’s Communist party begins its five-yearly congress next Sunday, Oct. 16, the most notable item of which will be the handing of a historic third leadership term to President Xi Jinping.

Important to business: Who in the lineup will become the new premier, who leads the cabinet but not the military, which is directly under Xi. The position oversees the finance ministry, commerce ministry and other government agencies that make many crucial decisions affecting banks, insurers and other businesses. Whoever is chosen will not be announced until a separate session of the National People’s Congress next March, but the day after the congress formally ends, members of the new Politburo Standing Committee — the highest body of political power in China — will walk on a stage in order of rank. The order in which the new leadership team walks may make clear who will become premier next year.

After Xi speaks on Oct. 16, “I think we will have a much better idea of whether it is more state-directed or more market-directed,” said Joe Mazur, a senior analyst at Trivium China, a Beijing consulting firm.

Taiwan a key issue. Biggest uncertainty about China for international businesses is whether it will pursue some kind of military action in the coming years against Taiwan. Even a vague mention by Xi at the party congress of a timeline for trying to bring Taiwan under the mainland’s political control could damage financial confidence in both Taiwan and the mainland, the New York Times notes.

Economic Reports and Events for the Week

Primary focus will be on inflation with the Producer Price Index (PPI) report and Consumer Price Index (CPI) report due. The September PPI report on Wed., Oct. 12 is expected to show a 0.1% month-to-month drop. After stripping out food and energy costs, PPI is forecast to rise 0.3% from August and 7.3% compared to a year ago. Bank of America forecasts a below-consensus flat PPI reading following two consecutive monthly declines, which could tamp down some inflation fears. CPI comes on Thurs., Oct. 13. BofA forecast a decline in the year-over-year inflation to 8.1% from 8.3% in August, while a modest acceleration in monthly headline CPI is anticipated to reflect a slower decline in energy prices (-3.5% M/M), continued elevated food inflation (+0.7%), and strong core inflation (+0.4%). Consensus estimates follow.

Looking ahead, other noteworthy dates on the calendar include Nov. 1-2, a week before Election Day, when the Fed holds its next two-day FOMC meeting, and Nov. 4, the final monthly Employment report before votes are counted.

Monday, Oct. 10

Federal Reserve speakers: Evans gives speech at NABE conference; Brainard speaks at NABE conference.
IMF and World Bank annual meetings begin in Washington.
Holiday: It’s a federal holiday, so most federal, state, and local government offices will be closed and there will be no mail service. Many banks will also be closed, but the stock and ag and energy markets will be open for business.

Tuesday, Oct. 11

National Federation of Independent Business releases its Small Business Optimism Index for September. The consensus estimate is for a 91.8 reading, matching the August figure. The index remains mired near a decade low.
Federal Reserve speaker: Mester speaks to Economic Club of N.Y.
IMF publishes its World Economic Outlook. Link.
IMF publishes its Global Financial Stability Report assessing the global financial system and markets. Link.

Wednesday, Oct. 12

MBA Mortgage Applications
Federal Open Market Committee (FOMC) releases the minutes from its late-September monetary-policy meeting. The FOMC at that meeting raised the federal-funds rates by three-quarters of a percentage point, for a third consecutive time, to 3%-3.25%.
Bureau of Labor Statistics releases the Producer Price Index (PPI) for September. Economists forecast the PPI will jump 8.4% year over year, after an 8.7% increase in August. The core PPI, which excludes volatile food and energy prices, is seen rising 7.2%, compared with 7.3% previously. The PPI spiked a record 11.7% in March and has since steadily, albeit slowly, declined.
Federal Reserve speakers: Kashkari takes part in town hall; Barr speaks at Fannie Mae event; Bowman on forward guidance.
G20 finance ministers and central bank governors meet as part of this week’s IMF and World Bank annual meetings.
Earnings: PepsiCo releases third-quarter fiscal-2022 results.

Thursday, Oct. 13

Jobless Claims
BLS releases the Consumer Price Index for September. Consensus estimates are for a year-over-year increase of 8.1% for the CPI and 6.5% for the core CPI. This compares with gains of 8.3% and 6.3%, respectively, in August. The S&P 500 rallied nearly 6% this past Monday and Tuesday on the hopes — once again — of a Fed pivot, and a lower-than-expected CPI would be cheered by both Main Street and Wall Street.
Fed Balance Sheet
Money Supply
Earnings: BlackRock, Delta Air Lines, Domino’s Pizza, Fastenal, and Walgreens Boots Alliance hold conference calls to discuss earnings.

Friday, Oct. 14

University of Michigan releases its Consumer Sentiment Survey for October. The consensus call is for a 57.5 reading, about one point less than the September data. Consumer expectations for inflation in one and five years were 4.7% and 2.7%, respectively, in September. Those readings are each expected to decrease by 0.1 percentage point.
Census Bureau reports spending data for September. Economists forecast that retail sales will increase 0.2% month over month, after gaining 0.3% in August. Excluding autos, sales are expected to be flat. Consumer spending has proven resilient despite higher inflation, aided by a strong job market and excess savings.
Earnings: First Republic Bank, PNC Financial Services Group, U.S. Bancorp, JPMorgan, Morgan Stanley, Wells Fargo and UnitedHealth Group report quarterly results.
Federal Reserve speaker: Cook on the economic outlook.
China Producer Price Index, Consumer Price Index

Sunday, Oct. 16

Chinese Communist party begins its five-yearly congress during which President Xi Jinping is due to secure a historic third leadership term.

Key USDA & international Ag & Energy Reports and Events

Key USDA supply and demand reports come Wed., Oct. 12. Pro Farmer says big balance sheet changes are coming: USDA’s 2022-23 domestic balance sheets will reflect Sept. 1 stocks and the final 2022 wheat crop estimate, along with any changes to this year’s corn and soybean crop forecasts. That will produce some major adjustments to the supply and demand sides of the corn, soybean and wheat balance sheets.

On the energy front, OPEC and the U.S. EIA issue monthly market reports on Wednesday, with supply and demand forecasts. The International Energy Agency follows Thursday with its own report. EU energy ministers hold informal talks in Prague Wednesday. China trade data is due Friday.

Monday, Oct. 10

Ag reports and events:

Cane crush and sugar production data by Brazil’s Unica (tentative)
Holidays: U.S. (Columbus/Indigenous Day), Argentina, Canada, Chile, Japan, South Korea, Taiwan, Malaysis