Positive Outcome Likely for Trump/Xi Saturday Confab, But Talks to Continue into 2019

Posted on 11/28/2018 7:29 AM

Fed chairman speech | Farm bill progress | Biodiesel tax incentive | RFS | Hyde-Smith wins


A positive conclusion after Trump/Xi talks Saturday is the verdict of key sources on the topic. But details will be few as contacts believe both sides will continue talks into 2019. Bottom line: The upcoming Trump-Xi meeting will likely result in a detente in the tariff war as a broader deal is worked out.
     Today's main event is a lunchtime speech by Federal Reserve Chairman Jerome Powell. His speech will be followed by a Q&A session, with investors focusing on any insight into future monetary policy. Meanwhile, President Trump again attacked Powell, this time during an interview with the Washington Post (link): “I'm not even a little bit happy with my selection of Jay.”
     Farm bill talks continue, with the White House and congressional leaders taking over the biggest remaining snag: forestry management. Most sources signal a solution will be found and other remaining issues would then be quickly settled.
     Don't expect the House-proposed tax extenders' package and tax correction measures to be the final outcome. Sources say the Senate will call the shots on this one and Senate Democrats do not want to give President Trump and GOP leaders any help on correcting some of the tax reform glitches. Congressional sources, however, still predict a likely modified extension of the lapsed biodiesel tax incentive.
     President Trump is threatening to cut subsidies to GM. The president made the threat to cut subsidies for General Motors, including for electric cars, a day after the company said it was planning to cut thousands of jobs in the U.S. and end production at several factories. Media reports cast Trump as acting out of anger, saying he lacks the authority to cut off the federal government’s aid to the company, with electric car subsidies for GM expected to end soon anyway.


President Trump is scheduled to have dinner with President Xi Jinping of China on Saturday, after a gathering in Argentina of leaders from the Group of 20 industrialized nations. Sources give odds of over 50% that there will be something positive coming out of the session, but stress major issues will take into 2019, perhaps well into 2019 to resolve. If the talks are positive, Trump is expected to open the door to a truce between the world’s two largest economies, which have been in an escalating trade dispute.


     Both sides need some type of agreement, even if it is a framework for solutions to follow. Trump administration officials said that recent gyrations in the stock market, the interest rate increase and the layoffs announced by General Motors this week have added to a desire for something Trump can claim as a victory. China's Xi also needs at minimum a truce as economic reports out of China show that the Trump tariffs are indeed negatively impacting China's economy.


     “This is an opportunity with the two presidents to break through what have been disappointing discussions,” National Economic Council director Larry Kudlow told reporters at a White House meeting. Kudlow said Tuesday that issues of intellectual property, forced technology transfers, significant tariffs and non-tariff barriers, and issues of ownership “must be solved.” “There is a good possibility that we can make a deal and [Trump] is open to it. But on the other hand if these conditions I mentioned a few moments ago are not met or not dealt with, the president said, look, he‘s perfectly happy to stand on his tariff policies,” Kudlow said at a White House press briefing.


     Asked if China would consider selling U.S. Treasuries or reducing purchases should trade tensions worsen, Cui Tiankai, China's ambassador to the U.S., said, "I don’t think anybody in Beijing is thinking seriously about this. It could backfire. We don't want to cause any financial instability in global markets." China is the largest foreign holder of U.S. Treasury debt, with $1.15 trillion as of Sept. 30.


Forestry management issue remains biggest hurdle in farm bill as congressional leaders seek compromise. House Agriculture Chairman Mike Conaway (R-Texas) told reporters there were still a handful of issues to settle with other parts of the bill. But if and when a solution can be found dealing with forestry management, the other issues will likely be resolved quickly. “We’re darn near out of time, just from a mechanics standpoint,” Conaway said, regarding the time needed to make sure the legislative text is ready for consideration on the House and Senate floor before the end of the lame duck session. But Conaway was upbeat regarding an eventual solution. “The leadership has ownership of the forestry title, and they’re negotiating that, and we’re getting very close on the rest of it,” Conaway told reporters Tuesday evening outside the House chamber. “We’re really, really close.”


     Senate Minority Leader Chuck Schumer (D-N.Y.) suggested leaders were making headway on the issue. "The only things left are some forestry provisions, and we're making progress on that," he said during a news conference. But Senate Ag ranking member Debbie Stabenow (D-Mich.) again sounded the death knell bell when she said, "What the House is talking about would kill the farm bill.”


     Senate Agriculture Chairman Pat Roberts (R-Kan.) said the dispute focused on salvage timber. A provision in the House-passed farm bill would allow a categorical exclusion to facilitate harvesting of salvage timber following wildfires.


     House Ag ranking member Collin Peterson (D-Minn.) said: "There's never going to be a forestry title in any farm bill if I've got anything to say about it. Period. I'm tired of it. These people have overstepped their bounds."


     Comments: GOP leaders in the House and Senate want a farm bill. President Trump wants a farm bill. The will is there, so most sources signal the odds are over 50% that the farm bill end zone will be found. As for some of the additional issues remaining beyond forestry management, one of them is farm program payment eligibility, where the House language shows significantly expansion. Sources expect eventual language will similar to what it is currently, thereby dropping a lot of the House-pushed efforts on this matter, as well a Senate provision that would reduce the adjusted gross income limit for commodity programs to $700,000 a year, down from the current cap of $900,000. The final package will likely include several changes to Title I farmer safety net programs that would please producers, including loan rate increases and an opportunity to make an annual election between modestly improved PLC and ARC safety net programs. They are also likely to get to updated yields.


Reports note EPA will not adjust final RFS levels re: small refiner waivers. Media reports Tuesday indicated that EPA will finalize Renewable Fuel Standard (RFS) levels for 2019 biofuels at 19.88 billion gallons, the same mark the agency proposed earlier this year, including a mark of 15 billion gallons for convention ethanol.


     For biomass-based biodiesel in 2020, EPA is expected to set a mark of 2.43 billion gallons.


     Reuters reported that an EPA official said they did not adjust the 2019 RFS volume requirements to reflect small-refiner exemptions, indicating they had no waiver requests that they could base any adjustments on at this stage. An official told the news service those exemption requests were not expected to be known until late-2019 or early 2020.


     In proposed levels for the 2019 biofuel and 2020 biomass-based biodiesel, EPA stated it made no adjustment in those levels based on the small refiner exemptions. While noting the agency has granted the exemptions previously, "at this time no exemptions have been approved for 2019, and therefore we have calculated the percentage standards for 2019 without any adjustment for exempted volumes. EPA is maintaining its approach that any exemptions for 2019 that are granted after the final rule is released will not be reflected in the percentage standards that apply to all gasoline and diesel produced or imported in 2019."


     Further, EPA also appeared to make clear it was not taking comments on the issue. "EPA is not soliciting comments on how small refinery exemptions are accounted for in the percentage standards formulas [the energy law], and any such comments will be deemed beyond the scope of this rulemaking." EPA data shows that there have been 15 such requests received for the 2018 compliance year while the agency received 36 requests for 2017 and 20 for 2016. EPA granted 19 requests for 2016 (one still pending), 29 for 2017 (seven still pending) and has acted on none of the requests for 2018.


     Comments: With RIN prices so low, observers wonder why EPA would grant any waivers at this time.


What will be the fate of the tax extenders' package introduced in the House, including biodiesel? Key Senate members are already saying they will alter the House language, signaling that chamber will eventually decide the fate of the package. Most sources do not see the package being attached to a must-pass spending measure. However, contacts believe a modified extension for biodiesel (2018 and perhaps another year or two) will likely find its way out of this Congress.


Other items of note:

  • Russia plans to deploy more of its advanced S-400 surface-to-air missile systems to Crimea as the conflict intensifies over its seizure of three Ukrainian navy ships and their crews. "We will fight for our freedom, we will fight for our democracy, we will fight for our soil," Ukraine's President Petro Poroshenko told NBC News. "The Russians will pay a huge price if they attack us." Link for details.

  • Hyde-Smith wins Mississippi Senate run-off election. Republican Cindy Hyde-Smith emerged as the victor in a race against Democrat Mike Espy, a former USDA Secretary, winning 53.9% of the vote to Espy's 46.1%, with 97% of precincts reporting. The winning percentage was far short of President Trump’s level of support in 2016, when he carried the state by 18 points. The run-off race, which featured two campaign-style stops by President Donald Trump and some racial overtones, keeps Hyde-Smith in the seat she was appointed to when Sen. Thad Cochran (R-Miss.) retired earlier this year. She is the first woman elected to the U.S. Senate from Mississippi. Republicans will hold a 53-47 margin in the U.S. Senate for the 116th Congress. The Biloxi (Miss.) Sun Herald reports that Hyde-Smith “overcame racially-tinged verbal gaffes late in her campaign” to defeat Espy, “who was seeking to become the state’s first black senator since Reconstruction.” While Hyde-Smith “was supposed to enjoy an easy path” in the runoff, it “turned into a referendum on race and Mississippi’s racial past...that thrust Hyde-Smith into controversy and put her uncomfortably in the national spotlight.”

  • Democrats will vote on the next House speaker today. Nancy Pelosi (D-Calif.) is expected to win the nomination but the level of support she receives at the closed-door meeting will be a key signal of how much opposition she will face next January during the much-tougher vote on the House floor. Pelosi met with incoming Democrats on Tuesday, acknowledging their “idealism, integrity and imagination” but warning against intransigence.

  • How does North Korea keep going amid sanctions? Ships with illegal North Korean freight use fake customs manifests, paint on false names, turn off tracking devices and signal fictitious data to evade detection. A Wall Street Journal review of confidential documents and interviews with officials suggest that dozens of ships and companies linked to illegal North Korean trade have carried hundreds of millions of dollars-worth of fuel, coal and other products to the country. They do so through a shifting array of tactics, some as simple as repainting vessels to disguise their origins and others reaching deeper with phony customs manifests and false tracking signals from cargo ships. The sanctions are supposed to punish North Korea, but so far they’ve only shown the gaps in the ability to oversee seaborne trade flows. Link to Wall Street Journal article.

  • TransCanada has asked a Montana court to allow it to resume pre-construction activities on its Keystone XL oil pipeline after a U.S. judge blocked construction on the $8 billion project earlier this month. "It is too soon to say what the injunction will mean to the timeline and cost of the Keystone XL pipeline, but we remain confident the project will be built," TransCanada spokesman Terry Cunha said in a statement.

Markets. The Dow on Tuesday rose 108.49 points, 0.44%, at 24,748.70. The Nasdaq edged up 0.85 point, 0.01%, at 7,082.70. The S&P 500 moved up 8.72 points, 0.33%, at 2,682.17.


     Fed Chair Jerome Powell delivers what some describe as the most critical speech of his short time leading the central bank. He's likely to provide insights into the Fed's plans for monetary tightening and may address growing hostility from President Trump, who said in an interview on Tuesday he's "not even a little bit happy with my selection of Jay" and believes the central bank is "way off-base with what they're doing."


     The U.S. dollar is nearing 2018 highs, powered by remarks from National Economic Council Larry Kudlow that the upcoming G20 summit was an opportunity to "turn the page" on the U.S.-Sino trade war. Other economic news today includes the Commerce Department's second estimate of third-quarter GDP growth, which is expected to be confirmed at a 3.5% annualized rate.


     Fed officials acknowledge economic weaknesses, bur remain upbeat. Bloomberg News reported that Federal Reserve officials on Tuesday “sprinkled small doses of concern into otherwise upbeat assessments of the U.S. economy.” Chicago Fed President Charles Evans, appearing on a panel discussion “with two other regional bank chiefs, pointed to growing skilled-labor shortages,” while Kansas City’s Esther George “said pain in the agriculture sector has been exacerbated by the trade dispute with China.” None, however, “signaled a desire to halt gradual interest-rate increases,” and Evans “repeated his desire to see monetary policy return to “something that’s more neutral.”


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