Evening Report | August 17, 2022

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FOMC minutes: No clear bias on next rate hike... Minutes from the July 26-27 Federal Open Market Committee (FOMC) meeting provided no clear signal whether Fed policymakers favored a smaller 50-basis-point increase in September or another 75-point hike. Fed officials said the pace of future rate increases would be data-dependent, with some indicating rates would need to stay at a “sufficiently restrictive level” for “some time” in order to control inflation.

“Participants judged that moving to a restrictive stance of policy was required” to promote “maximum employment and price stability,” according to the minutes. Officials also agreed “as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.”

Though there was little specific guidance for future rate increases, some officials acknowledged there was a risk the central bank could raise rates and tighten financial conditions by more than necessary.

Economists viewed the minutes as mostly neutral – some saying they were mildly hawkish and others believing they were slightly dovish. The truest gauge was a relatively muted market reaction, indicating traders viewed the minutes as noncommittal as they await more inflation data.

U.S. retail sales unchanged in July... U.S. retail sales were unexpectedly unchanged in July as lower prices at the pump reduced gas sales but allowed spending elsewhere. Overall retail sales—a measure of spending at stores, online and in restaurants—were flat in July compared with the prior month’s revised 0.8% increase. But a measure of spending that strips out gasoline and auto sales rose 0.7% last month from June, showing shoppers maintained the ability to spend with much of the spending moving online.

Spending at gasoline stations, which makes up about one-tenth of retail purchases, fell 1.8% on the month. Vehicle sales, which make up about a fifth of retail spending, declined 1.6% as inventory shortages lingered. Consumer purchases of electronics rose last month, as did furniture, personal care and home-improvement store sales. Spending at nonstore retailers, or online shopping, jumped 2.7% from the prior month.

Vehicle travel drops in June... U.S. vehicle travel in June fell 1.7% to 282.1 billion miles, the first year-over-year monthly decline in American driving since February 2021, the U.S. Transportation Department said. The 4.8-billion-mile decline came as average fuel prices topped $5 a gallon in mid-June.

U.S. driving rose 11% in 2021 after falling in 2020 to the lowest annual total since 2003 due to Covid restrictions.

Argentine corn acres expected to decline in 2022-23... Argentina’s planted corn acreage for 2022-23 is expected to shrink 200,000 hectares (2.6%) to 7.5 million hectares, the Buenos Aires Grain Exchange forecast. The exchange expects corn plantings to decline due to “a very tight level of (moisture) reserves at the beginning of the early sowing window for cereal, (and) a unfavorable input/output ratio in relation to past campaigns.”

Without specifically saying soybean acres would rise at the expense of corn, the exchange referenced “a significant increase in costs, which decreases returns in an environment of high uncertainty and increases direct competition from crops with lower investment requirements.”

Placements key in Cattle on Feed data... USDA’s Cattle on Feed Report Friday afternoon is expected to show the Aug. 1 feedlot inventory up 0.7% from year-ago at nearly 11.2 million head. While placements on average are expected to be down 1.5% from last year, estimates range from a 5% drop to 1.3% increase, meaning there’s uncertainty among analysts. Much of the uncertainty is likely tied to the number of heifers moved off pastures due to ongoing drought in the Plains and West. While heifer retention for breeding remains low, there’s also a dwindling number of heifers available. July marketings are expected to be down 2.9% from last year.

Refresher on ERP… We’ve received some questions about USDA’s Emergency Relief Program (new name for WHIP+). Following are some reminders on the program:

• For crops covered by crop insurance, the ERP Phase 1 payment calculation for a crop and unit will depend on the type and level of coverage obtained by the producer. Each calculation will use the following ERP factor based on the producer’s level of crop insurance or Noninsured Crop Disaster Assistance Program (NAP) coverage.

Crop Insurance: The ERP factor is 75% to 95%, depending on the level of coverage ranging from catastrophic to at least 80% coverage.

NAP: The ERP factor is 75% to 95%, depending on the level of coverage ranging from catastrophic to 65% coverage. FSA will perform a conventional NAP payment calculation with an adjusted guarantee equal to the ERP Factor.

• ERP Phase 1 payment calculation for a crop and unit will depend on the type and level of coverage obtained by the producer. RMA and FSA will calculate each producer’s loss consistent with the loss procedures for the type of coverage purchased but using the ERP factor in place of the coverage level. This calculated amount would then be adjusted by subtracting out the net crop insurance indemnity or NAP payment, which is equal to the producer’s gross crop insurance indemnity or NAP payment already received for those losses minus service fees and premiums.
• Payments are prorated:  ERP Phase 1 payments for crops covered by crop insurance will be prorated by 75% to ensure that total ERP payments, including payments under ERP Phase 2, do not exceed the available funding. ERP Phase 1 payments for NAP-covered crops will not be prorated due to the significantly smaller NAP portfolio that by its nature only covers smaller acreages and specialty crops that are not covered by crop insurance.
• The Notice of Funding Availability for ERP says the following:  A total of $10 billion was allocated to certain disaster relief programs. Congress allocated $750 million for livestock assistance. Additional payments may be provided if funds are available after ERP Phase 2.

DOE dramatically reduces number of EVs qualifying for new tax credit... The Biden administration issued initial guidance on the new tax credits for electric vehicles (EVs) under the Inflation Reduction Act (IRA) and the number of vehicles eligible for the credits is down significantly from levels prior to IRA. The Department of Energy (DOE) noted 18 model year 2022 and 3 model year 2023 vehicles that qualify for the credits for the remainder of 2022, down from 53 all electric vehicles and 89 plug-in hybrids that were eligible for credits before IRA became law.

The reductions come due to North American assembly requirements in order for vehicles to qualify for the credits and there are also manufacturers that have met the 200,000-vehicle cap. For 2023, the cap is removed but other provisions on battery components and critical minerals that mean currently no models would qualify for the new credits. Future guidance is unclear on how carmakers and consumers can determine the source of battery components and critical minerals relative to future purchases. The Department of Treasury said it will “post information and request comments from the public on various existing and new tax credits in the coming weeks and months, including on further changes to eligibility rules for clean vehicle tax credits.”