Hardline Conservatives in House Freedom Caucus Intensifying Pressure on Speaker

BRICS summit | Raimondo to China Aug. 27-30 | Panama Canal | U.S./Mexico GMO issue

 
Abbreviated dispatch today as I am at a Minnesota Ag Leadership conference.

— USDA daily export sale:  224,000 metric tons of corn to Mexico. Of the total, 112,000 metric tons is for delivery during the 2024-2025 marketing year and 112,000 metric tons is for delivery during the 2025-2026 marketing year.

— Equities: Asian and European stock markets were mixed in overnight trading. U.S. stock indexes are pointed to higher opening. In Asia, Japan +0.9%. Hong Kong +0.9%. China +0.9%. India flat. In Europe, at midday, London +0.7%. Paris +1.2%. Frankfurt +1.1%.

— Bond yields: U.S. 10-year bond yields are at a 16-year high as the persistently resilient economy has investors positioning for interest rates to remain elevated. Meanwhile, Japan’s 10-year government bond yield reached a new nine-year high Tuesday amid the upward pressure in global interest rates.

— Outside markets: The U.S. dollar index was little, with the euro and yen slightly weaker against the U.S. currency. The yield on the 10-year U.S. Treasury note was weaker, trading around 4.31%, with a mixed tone in global government bond yields. Crude oil has moved lower, with U.S. crude around $80.30 per barrel and Brent around $83.95 per barrel. Gold and silver were higher, with gold around $1,931 per troy ounce and silver around $23.47 per troy ounce.         

— Mortgage rates soared Monday to hit their highest mark in nearly 23 years. The average rate on the popular 30-year fixed mortgage reached 7.48%, a level last seen in November 2000, according to Mortgage News Daily.

— Grains mixed overnight. Corn and soybeans saw lack of conviction either way overnight, though wheat futures saw corrective buying. As of 7:30 a.m. ET, corn futures were trading steady to a penny higher, soybeans were 2 to 3 cents lower and wheat futures were 3 to 5 cents higher. Front month crude oil futures were modestly weaker, and the U.S. dollar index was just 35 points higher.

— Cattle futures continue bounce. Cattle futures continued last Friday’s bounce and bid above $180. Last week’s cash average came in 84 cents lower than the prior week to $185.04, drug lower by trade taking place late in the week. Wholesale values struggled to maintain strength yesterday, with Choice falling 55 cents to $315.56 and Select falling $1.03 to $287.33. While an improvement from the midsession report, weaker wholesale prices will not encourage packers to continue to pay up for cash cattle. Tight market supplies may force their hand this week and encourage higher cash cattle trade, but packers have shown they are willing to wait as long as they can before making purchases.

— Hog futures struggle against resistance. Hog futures gapped higher but ultimately continued the downtrend stemming from the August 1 high. The cash index continues to deteriorate with the August 17 quote falling 74 cents to $99.61, putting the index below $100 for the first time since July 12. The seasonal slide in cutout values is of no help to bulls either, with wholesale prices falling 96 cents to $105.21, with losses across the board apart from bellies and butts.

— The most recent employment survey conducted by the New York Federal Reserve indicates that American workers are seeking higher salaries than ever before when considering new job opportunities. This trend suggests that the labor market remains robust and that inflation might persist at levels higher than desired by the Federal Reserve. This is because wages are recognized as a key factor contributing to elevated prices. The survey, published on Monday, discloses that the average "reservation wage," which represents the minimum acceptable salary for changing jobs, surged to $78,645 during the second quarter of 2023. Employers have been striving to meet these wage expectations, leading to a 14% increase in the average full-time job offer over the past year, now standing at $69,475. This data underscores the ongoing pressure in the labor market and the potential implications for broader economic indicators, including inflation.

— The 15th BRICS summit, involving Brazil, China, India, Russia, and South Africa, commenced in Johannesburg, South Africa. This group aspires to be seen as a counterpart to the G7, a consortium of affluent nations. Collectively, the BRICS nations encompass 41% of the global population and contribute 26% of the world's GDP. Originating from an acronym coined by a British economist in 2001 for an American bank, the BRICS bloc positions itself as a primary platform for criticizing the international order led by Western nations.

— In China, the PBOC set the strongest yuan fixing on record overnight which has helped the currency stabilize and that is contributing to risk-on money flows this morning.

— Ukraine is continuing negotiations with major insurance companies to secure coverage for ships that traverse to and from its Black Sea ports. This endeavor is a crucial step toward fully restoring its essential global grain exports. The development of an insurance mechanism has been prompted by Russia's withdrawal from the Black Sea Grain deal, which occurred last month and has raised concerns about the secure transit of ships transporting grain from Ukrainian ports. The disintegration of this agreement has already contributed to an increase in global food prices and has the potential to exacerbate hunger issues in impoverished nations. To ensure the continuity of grain shipments, the Ukrainian government plans to share potential losses with insurers. This cooperative arrangement is intended to make insurance coverage for journeys through risky Ukrainian waters more affordable for commercial shipping enterprises.

     Of note: Turkish diplomatic sources are being quoted by the state news agency Anadolu as saying that Turkish Foreign Minister Hakan Fidan will be in Ukraine Friday, likely an effort to continue the Turkish push for there to be some kind of agreement to restart the Black Sea Grain Initiative.

— Commerce Secretary Gina Raimondo will travel to China Aug. 27-30 for meetings with senior Chinese officials and U.S. business leaders, according to the Commerce Department. She will visit both Beijing and Shanghai during a trip that begins Sunday. Raimondo’s visit will come after Secretary of State Antony Blinken and Treasury Secretary Janet Yellen traveled to Beijing earlier this summer. Ahead of Raimondo’s trip, the U.S. offered an apparent olive branch on Monday when it lifted restrictions on 27 Chinese companies and organizations. But deep divisions continue to weigh on the relationship between the world’s two largest economies.

     Meanwhile, U.S. Trade Representative Katherine Tai recently held meetings in Indonesia where she engaged with the U.S.-ASEAN Business Council and government representatives. Following her time in Indonesia, she is set to attend a G20 trade and investment ministers' conference in India until Saturday. This event will include conversations on the sidelines with officials from Europe and Japan. This strategic engagement highlights the administration's focus on fostering trade relations and collaborations within the Asian region.

— Russia's defense ministry announced that one of its fighter planes successfully destroyed a Ukrainian "reconnaissance boat" in the Black Sea. This incident follows a recent occurrence where a Ukrainian drone targeted a naval base along the Black Sea coast, causing damage to a Russian warship. There has been a notable rise in maritime attacks since Russia's withdrawal from a U.N.-mediated agreement in July, which had permitted the export of grain via sea routes. Additionally, Russia's government reported that it had taken down two Ukrainian drones en route to Moscow, the country's capital.

     Meanwhile, Russia is on the attack in northeastern Ukraine as it seeks to take back territory that Kyiv recaptured last fall and to divert Ukrainian forces from their counteroffensive in the south and east.

— Concerns are growing over delays and potential shortages due to recent tightening of water conservation measures by the Panama Canal Authority. This move has the shipping industry worried about disruptions and congestion that might impact the upcoming holiday season. The Panama Canal Authority has implemented measures to conserve water, including reducing maximum ship weight allowances and daily crossings. These changes respond to rainfall deficits in the region, highlighting the escalating climate risks affecting ocean shipping. With falling inventories and an anticipated demand rebound, the Panama Canal — responsible for 40% of container traffic from Asia to Europe — could face increased pressure, warns Christian Roeloffs, CEO of Container xChange, a container logistics platform. 

     The canal's restrictions, which have been in place since earlier this year, affect a wide range of goods and about 170 countries, including products like liquefied natural gas and soybeans. The Panama Canal is crucial for American shippers bound for Gulf and East Coast ports. 

     Given these conditions, ship owners are faced with the dilemma of either opting for alternative routes, which could significantly extend travel distances, or dealing with extensive queues involving over 200 vessels, leading to delays of over 20 days for some ships. Over 3% of global trade passes through this nearly 110-year-old canal, which also represents a vital source of revenue for Panama.

— ERP Phase 2 payments near $6 million. Payments under Phase 2 of the Emergency Relief Program (ERP) continue to edge higher, with the total as of Aug. 20 at $5.96 million paid to 4,291 recipients — an average payment of $1,389. Total payments under ERP Phase 1 and 2 remained at $7.44 billion and totals for other USDA aid efforts were also unchanged in the latest week.

— Farm bill update. Key lawmakers continue to use the word “creative” when it comes to improving some farm safety net features in Title I of the omnibus bill. That suggests some possible twists to increasing reference prices and perhaps some type of acreage base update, at least for beginning farmers. Both issues have hurdles, including funding and complexity.  

— Efforts by farm-state lawmakers to federally override California's Proposition 12 animal welfare law are facing opposition from activist farm groups. The override proposal, known as the EATS Act (Ending Agricultural Trade Suppression Act), is met with concerns that it could harm small farmers and must be excluded from the farm bill. Efforts are being made to include the EATS Act if it fails to as a standalone bill. Companion versions of the EATS Act were introduced in the Senate and House after the Supreme Court upheld Proposition 12 as constitutional in May.   

     Critics argue that the EATS Act could lead to market concentration favoring multinational corporate agribusinesses, potentially harming small farmers. A coalition, including Farm Action Fund, the Natural Resources Defense Council, and the ASPCA, launched the "Defeat Eats" campaign to oppose the EATS Act. Groups including the Organization for Competitive Markets and the Kansas Cattlemen's Association have expressed early opposition, contending that including the EATS Act in the farm bill could negatively impact family farming and infringe on state laws and rights.

     Of note: Around 150 members of the House have voiced their strong opposition to including the EATS Act or similar legislation in the coming farm bill. They believe it could threaten small farmers, impinge on state laws, and compromise states' rights. Critics say the EATS Act's broad language could potentially undermine a wide range of state-level health, safety, and welfare laws. Despite being framed as protective of states' rights, concerns are raised about its potential impact on existing laws. The EATS Act would allow various parties, including producers, distributors, consumers, and laborers, to file lawsuits in federal court to invalidate state or local pre-harvest agricultural production standards or preconditions applied to products sold in interstate commerce.

     Supporters of the EATS Act, including Sen. Roger Marshall (R-Kan.) and Rep. Ashley Hinson (R-Iowa) stress the importance of protecting interstate commerce and ensuring that state-specific regulations don't apply to other states.

— S&P joins Moody’s in cutting U.S. banks. After Moody's Investors Service recently downgraded ratings for several U.S. banks, S&P Global Ratings is now following suit, downgrading and offering a gloomy outlook for additional banks. S&P's actions are prompted by a similar set of challenges that are creating difficulties for these financial institutions. S&P highlighted in a note that many depositors have moved their funds to accounts with higher interest rates, resulting in increased funding costs for banks. This shift has led to decreased liquidity for numerous banks, compounded by the decreasing value of their securities, which form a significant portion of their liquidity.

— China's robust trade relationship with Russia is proving instrumental in supporting Russia's economy and contributing to its military endeavors, the Wall Street Journal reports (link). In the initial seven months of this year, China's total trade with Russia surged by 36% compared to the same period the previous year, reaching $134 billion. This partnership is aiding Russia by providing essential goods and components, especially for industries facing sanctions, as well as goods that have potential military uses, such as microchips and equipment for digging trenches. Concurrently, China serves as a valuable market for Russia's oil and gas exports, ensuring a buyer for these resources.

— Hardline conservatives within the House Freedom Caucus are intensifying their pressure on Speaker Kevin McCarthy (R-Calif.). These conservatives have taken an official stance against a "clean" short-term funding bill, which would prevent a government shutdown in the upcoming month. They are asserting that any stopgap funding bill must address specific policy areas such as border security, the Department of Justice and FBI, and what they refer to as "woke" policies in the military. Speaker McCarthy recently informed House GOP members about his plans to pass a short-term funding measure to extend gov’t funding beyond Sept. 30, the end of the fiscal year. This would avert a potential government shutdown, which has not occurred in years. However, the demands outlined by these hardline conservatives in the Freedom Caucus are adding pressure on House GOP leaders. Given their slim majority, House GOP leaders can only afford to lose a small number of votes to pass bills without relying on Democratic support. Link to House Freedom Caucus statement

     Impacts: Alec Phillips, the chief U.S. political economist at Goldman Sachs, considers the likelihood of a temporary government shutdown as high. The economic repercussions of such a shutdown are expected to be short-lived and relatively manageable, presenting both positive and negative aspects. The relatively modest economic impact increases the possibility that Congress might not take timely action, according to Phillips. Goldman Sachs estimates that a government shutdown would result in a GDP reduction of approximately 0.2 percentage points per week. However, this loss would likely be recovered in the subsequent quarter after the shutdown, based on the analysis by Goldman Sachs. But many individuals could go without their regular paychecks, potentially for weeks. Around one-third of civilian federal employees might be furloughed in this scenario, as projected by Phillips. On a national scale, the aftermath could include the delayed release of various economic data that policymakers depend on. This was observed during the longest government shutdown in U.S. history, lasting 35 days from late 2018 to early 2019.

— GMO issue with Mexico update. According to Reuters, Mexico's economy minister, Raquel Buenrostro, has stated that Mexico will not make any changes to its decree on genetically modified (GMO) corn in advance of a dispute settlement panel convened under the U.S.-Mexico-Canada Agreement (USMCA). The decree allows the importation of GMO corn for use as animal feed. Buenrostro affirmed that the decree is already established and includes provisions for defining corn designated for human consumption. The U.S. is disputing this decree through the USMCA, arguing that Mexico's actions do not align with their obligations under the trade agreement.    

     Mexico’s position. Despite the US assertion that Mexico's policy lacks scientific foundation, Buenrostro maintained that the Mexican decision is rooted in scientific reasoning. She criticized the US.'s refusal to cooperate on researching the potential impacts of GMO corn, stating that further research is a logical step for a government concerned about public health.

     The U.S. position is based on the belief that substantial research has already been conducted on GMO corn, with the U.S. having approved its usage.

     Besides the GMO corn dispute, Buenrostro mentioned ongoing discussions between the U.S., Mexico, and Canada regarding a resolution for the disagreement over Mexican energy policies. She indicated that the parties are working to formulate an agreement that would settle the matter without the need for a USMCA dispute settlement panel.

— India has no intention of implementing export restrictions on non-basmati parboiled rice, according to Food Secretary Sanjeev Chopra. When asked about potential restrictions on parboiled rice exports, Chopra clarified that there are no current proposals in place. He also addressed recent reports by stating that India has no plans to import wheat from Russia through diplomatic agreements. This refutes a Reuters report from the previous week which claimed that India was engaging in talks with Russia to secure discounted wheat imports. The move to import wheat at a lower price was allegedly aimed at managing inflation considering upcoming elections. India has already banned the export of non-basmati white rice, and the country's government-held wheat stocks are reportedly around 20% lower than the 10-year average.

— U.S. ag organizations issued a trade policy plea to all candidates running for the 2024 presidential election. They are urging these candidates to prioritize the establishment of new trade agreements that would offer fresh market access. This move is intended to bolster the U.S. ag sector and reduce the nation's dependence on China. The organizations emphasize that any approach towards holding China accountable should be responsible, avoiding potential harm to the significant export market for U.S. food and agriculture or the imposition of retaliatory tariffs that might adversely affect American farmers.

     In a letter directed to the presidential candidates and released just prior to the initial presidential debate of the 2024 election cycle, the organizations highlight the necessity for the U.S. to regain a leadership role in negotiating fresh Free Trade Agreements (FTAs) with other nations. They also advocate for the reinforcement and reform of the rules-based multilateral trading system. Drawing parallels with the U.S.-Canada-Mexico Agreement (USMCA), they propose that future FTAs could be modeled after it. These agreements could serve various purposes, such as safeguarding American workers and the environment, countering the growing geopolitical influence of China, and creating new export opportunities for American farmers. This would involve substantial reductions or eliminations of tariffs and non-tariff trade barriers.

     Perspective: Interest in trade policy is increasing, with farmers and analysts noting concerns including (1) the future of U.S./China relations, (2) other countries reaching bilateral or multilateral trade agreements, and (e) the growing penetration of Brazil as a key corn exporting nation, with Brazil perhaps becoming just as competitive as U.S. corn in the export sector.

— Canada is set to challenge the U.S.' imposition of import duties on softwood lumber products from Canada. The Canadian government has initiated a process to start a judicial review of the U.S. decision to maintain these duties. Mary Ng, the trade minister of Canada, stated that notices of intent for a judicial review were filed regarding the recent US decision to uphold these "unwarranted duties" on Canadian softwood lumber products. The current duties have led to most Canadian softwood lumber exports being subject to a combined duty rate of 7.99%. This situation has been a longstanding dispute between the U.S. and Canada, and there appears to be little indication of change at this juncture. The conflict over softwood lumber is one of the longest-running trade disputes between the two countries.

— Japan will start releasing treated radioactive wastewater from its Fukushima nuclear plant into the Pacific Ocean as early as Thursday, despite fierce objections from some countries. The Prime Minister, Fumio Kishida, recently confirmed that the process will commence on Aug. 24. This effort will involve discharging approximately 1.3 million cubic meters of treated water — equivalent to around 500 Olympic-sized swimming pools — over a span of at least 30 years. However, the plan has encountered strong opposition from countries such as China and others, who are expressing concerns about the safety of this proposal. some scientists worry that the wastewater, even diluted, could harm marine life and pollutants could accumulate in the already frail ecosystem.

     Impact: Local fishing groups and nearby countries, including China, oppose the scheme. Hong Kong has expressed strong opposition to this move and has threatened to impose trade restrictions on seafood imports from Japan. Hong Kong Chief Executive John Lee stated on Facebook that Japan's decision to release the contaminated water is seen as "irresponsible" and poses significant risks to food safety, along with causing irreversible pollution and damage to the marine environment. In response, Lee has instructed relevant departments in Hong Kong to impose import controls on Japanese seafood. Last month, the Hong Kong government announced its intention to ban various Japanese aquatic products, including live, frozen, refrigerated, and dried items, as well as sea salt and seaweed, if the water release took place. The ban would apply to products originating from specific Japanese regions, such as Tokyo, Fukushima, Chiba, Tochigi, Ibaraki, Gunma, Miyagi, Niigata, Nagano, and Saitama. Notably, Hong Kong is the second-largest destination for agricultural and fisheries exports, trailing only mainland China, which underscores the potential impact of these trade restrictions on Japanese exports.

— Former President Donald Trump's recent indictment in Georgia seems to have positively impacted his popularity among Iowa Republican voters, as a new poll reveals he is leading Florida Governor Ron DeSantis by a significant 23-point margin in the state. Notably, the Iowa caucus, which marks the beginning of presidential primary contests, is scheduled to take place in less than five months.      

     Of note: In the Iowa poll of GOP caucus-goers, 52% say their minds aren't made up over who's the best candidate and that they could be persuaded to support another candidate.. The survey, the most closely watched poll in the state, is led by the Des Moines Register newspaper. NBC News and Mediacom, Iowa’s largest cable provider, are also sponsors of the poll ahead of the Jan. 15 caucuses.

— The Republican National Committee revealed late Monday that eight candidates have qualified for the party’s first primary debate, to be held Wednesday night. Florida Gov. Ron DeSantis, entrepreneur Vivek Ramaswamy, former South Carolina Gov. Nikki Haley, former New Jersey Gov. Chris Christie, Sen. Tim Scott (R-SC), former Vice President Mike Pence, former Arkansas Gov. Asa Hutchinson, and North Dakota Gov. Doug Burgum will be on stage at Milwaukee’s Fiserv Forum for the debate.  Former President Donald Trump said Sunday night he would skip the debate, citing his massive lead over the rest of the field in national and state polls.

     Meanwhile, Trump is expected to turn himself in Thursday to authorities in Fulton County, Georgia. This is likely to result in his first mugshot, as he is facing charges connected to his and his associates' attempts to overturn Georgia's 2020 election results. Recently, he agreed to post a $200,000 bond as a condition for his release in this case. This contrasts with his previous three indictments, where he was released on his own recognizance without any financial requirements.
 

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