UPDATED: Federal Reserve Expected to Cut Rates 25 Basis Points Today; More Ahead?

Posted on 09/18/2019 6:33 AM

Upbeat forecast signals Saudi oil production coming back online, but others differ

In today's updates:

* Fed seen cutting interest rates today by 25 basis points; presser & updated forecasts
* Next Fed focus on clues of any more rate reductions
* Fed will conduct another market operation today to control short-term interest rates
* Chinese trade delegation arrives in Washington today
* Size and range of U.S. farm product purchases by China on the agenda
* Trump again talks potential for U.S./China deal... or maybe not
* Saudi energy minister gives upbeat assessment of oil coming back online
* Sec. of State Pompeo in Saudi Arabia to discuss response to attacks on oil sector
* White House mulling when timing of coming RFS package announcement
* Grassley says coming RFS changes a 'win-'win' situation
* Peterson says 'Senate leadership' cause of CCC spending stipulations, but...
* Sen. Hoeven, other GOP senators urge full CCC funding without stipulations
* Senate panel releases summary of Agriculture spending bill
* Trump officials to revoke California’s power to set auto emissions standards
* Biden, Warren make gains in latest poll
* Israel election too close to call
* Tennessee first state to convert its Medicaid program into a block grant
* Japanese August exports fell more than expected

Markets: Brent and WTI futures edged lower today after tumbling Tuesday as Saudi Aramco said it had revived 41% of capacity at a key crude-processing complex days after the weekend’s aerial attack. Both crude benchmarks are still trading about 7%-8% higher than the pre-attack price. Meanwhile, figures released by the American Petroleum Institute on Tuesday suggested a surprise 592,000 barrel increase, while U.S. government data on crude stocks is due this morning.

The alternative meat market is poised to rise to $240 billion over the next two decades as new technologies gain ground and consumers change diets, Jefferies said. Faux meat may make up 9% of the estimated $2.7 trillion global meat market by 2040, up from less than 1%. Plant-based meats, like from Beyond Meat, are currently leading the category but lab-created "cellular" meat could overtake it. Link to Bloomberg item.

 

U.S./China trade policy update:

  • China's trade and economic officials arrive in Washington today. Meetings with their U.S. counterparts will take place as soon as Thursday; if not, Friday.
  • China continues to push an initial deal focused on agriculture and other less contentious matters, but U.S. officials want an overall comprehensive, enforceable accord. Meanwhile, the size and range of U.S. agricultural goods to be bought by Beijing is far from clear, with expectations a prior list could be expanded to include purchases of other U.S. products.
  • The Trump administration might consider removing new tariffs if there is an agreement on intellectual property, an issue most see as a high hurdle to accomplish in the new few weeks.
  • Trump again talks potential for U.S./China deal... or maybe not. President Donald Trump told reporters Tuesday, en route from New Mexico to California, that the U.S. and China could ink a trade deal soon, or it may still wait until after the 2020 elections. "I think there will be a deal maybe soon, maybe before the election, or one day after the election. And if it is after the election, it will be a deal like you have never seen, it will be the greatest deal ever and China knows that," Trump said. As for the elections, Trump stated China thinks he will win in November 2020. "China thinks I am going to win so easily and they are concerned because I told them: 'If it's after the election, it's going to be far worse than what it is right now.' I told them that. Would they like to see somebody else win? Absolutely," Trump added.

Grassley: Coming RFS changes a 'win-win' situation. A tentative agreement to bolster ethanol and biodiesel use developed with President Trump last week represents a “win-win situation” for both renewable fuel producers and small oil refiners, Sen. Chuck Grassley (R-Iowa) told reporters.

The tentative plan was the topic at at Sept. 11 White House meeting with President Trump.

Grassley said a coming announcement would ensure that when the EPA sets biofuel quotas, those targets aren’t undermined by refinery exemptions. “When we left the White House, there was a feeling there was that agreement,” Grassley said. “If it comes out on paper like I just described to you, the industry and the ag groups are committed to saying the president has delivered on what we want.”

Grassley stressed he is reserving final judgment until he sees the details on paper.

Link to background on this topic.

Saudi Arabia oil sector update:

  • Oil supply fully back online? Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, said at a press conference that oil supply from the kingdom was fully back online and that it will keep full oil supply to its customers for the month of September. Saudi Aramco’s chief executive said it took less than seven hours to extinguish the weekend’s fires and that all necessary activities to restore production will be finished before the end of this month. However, on Tuesday, the energy minister said the kingdom had restored half of the lost production and would fully restore output by the end of September. He added that full production capacity of 12 million b/d would not be available until the end of November. Some other observers labeled the forecasts as optimistic, noting they did not fully account for the severity of the damage at the facility. Others said Saudi Arabia’s total output could be still around 2 million barrels a day below its pre-attack level of 9.8 million b/d.
  • King Salman, Saudi Arabia’s monarch, on Tuesday urged the international community “to shoulder its responsibility in condemning the perpetrators” and confront the “barbaric acts.” The Saudi cabinet in a statement said the attack is “an extension of previous acts of aggression on Saudi Aramco’s pumping, using Iranian weapons.”
  • Saudi Arabia has been drawing down its own oil stockpiles to try to keep international customers fully supplied since the outage, and has also diverted its remaining output of around 4 million barrels a day from its own domestic refineries and power plants to help maintain exports.
  • U.S. Secretary of State Mike Pompeo will be in Saudi Arabia today. The U.S. could release an American report on the attacks against oil facilities in the kingdom last weekend. The New York Times reported (link) that one theory is that missiles were launched from Iran but programmed to fly through Iraqi airspace.
  • Iran denied it carried out the attacks on Saudi Arabia's oil facilities and said it will respond swiftly to any action against it, ISNA reported. President Rouhani said the Saudi campaign in Yemen is a "warning and lesson." Riyadh promised evidence of Iran's involvement and reassured customers exports will keep flowing.
  • The attacks represent a big test for Prince Abdulaziz (link to NYT article) only weeks into his tenure as energy minister. And a surge in oil prices could hurt the U.S. economy (link to NYT item).

CCC funding stipulations remain issue in House stopgap spending bill. Trade assistance for farmers hit by retaliatory tariffs and the details of several health care program extensions are still blocking an agreement on a stopgap funding measure in the House.

Stipulations. Latest word is that the bill was likely to include an increase in the Commodity Credit Corporation's (CCC) $30 billion borrowing cap that the Trump administration asked for earlier this month. But provisions on "accountability and transparency" were still under discussion.

House Ag Committee Chairman Collin Peterson (D-Minn.), in remarks Tuesday on Agri-Talk, said the CCC issue was because of “Senate leadership.” But that is not the case based on public and private statements from others, including some key Democrats. Rep. Rosa DeLauro (D-Conn.), a senior Agriculture Appropriations Subcommittee member, on Tuesday released a letter to USDA Secretary Sonny Perdue demanding a briefing for lawmakers on where the money from the latest round and earlier $12 billion tranche of aid has been going. "Going forward, American farmers deserve transparency and to know these payments are going to them and not corporate agribusinesses," DeLauro wrote.

House Agriculture Committee Democrats urged their leadership Monday to reconsider and include the White House-backed language on agricultural assistance in the continuing resolution. "Although we mutually have concerns with President Trump’s approach to trade negotiations, we refuse to engage in the same tactics that punish our constituents and harm our communities that rely on agriculture," said Peterson and Filemon Vela of Texas and Jim Costa of California, who chair Agriculture subcommittees on farm commodities and livestock, respectively.

Updating earlier item in Policy Updates, including a link to an interview with Rep. Collin Peterson (D-Minn.) with Joel Heitkamp in which (near the end) Collin talks about his conversation with House Speaker Nancy Pelosi (D-Calif.) and tells her that she is creating an issue (CCC funding stipulations) where Republicans can beat up on Democrats). Link 

House Rules Chairman Jim McGovern (D-Mass.), also an Agriculture Committee member, said Tuesday he wants to see the borrowing cap lifted as part of the continuing resolution. But other Democrats were opposed. “I want to see the tariffs taken care of, so we don’t have to have a socialistic system,” said Sen. Jon Tester (D-Mont.).

McGovern said Rules could take up the stopgap measure today, after reporting out "same-day" rule authority to bring the bill to the floor anytime through this Friday.

On the Senate side, Sen. John Hoeven (R-N.D.), chairman of the Senate Ag Appropriations Committee, said the House should support farmers and ranchers, and ensure Market Facilitation Program (MFP) payments are not delayed. In a letter Tuesday, Hoeven led Republican members of the Senate Appropriations Committee in pressing House Speaker Nancy Pelosi (D-Calif.) and House Appropriations Committee Chair Nita Lowey to support the nation’s farmers and ranchers and ensure that Market Facilitation Program (MFP) payments for producers are not blocked or delayed in the House of Representatives’ continuing resolution (CR). The Senate GOP group urged the House to reimburse the CCC, which is routinely supported by Congress, to ensure producers have access to much-needed agriculture assistance. “Our nation’s farmers and ranchers badly need the MFP committed to them by the President, using the legal authority that we in Congress provided. For many of our producers, MFP will be the difference between continuing the family tradition or being denied the credit necessary to farm and ranch for another year,” the letter said. “The upcoming CR must include the anomaly requested by USDA that would allow them to access the $30 billion in spending of the CCC prior to October 1st to ensure that MFP payments and farm bill programs continue uninterrupted,” the senators wrote. Link to letter.

Senate panel releases summary of Agriculture spending bill. The Senate Appropriations Committee released a summary of its draft fiscal 2020 Agriculture spending bill. The measure would provide $23.1 billion in discretionary funding, or $58 million above the current year. Link to summary.

Other items of note:

  • Advice from a USDA FSA contact: “Farmers that have been delayed on getting MFP better check with local FSA office about hopefully getting paid before October 1. FSA usually does some computer rollover procedures right before start on new Oct. 1 fiscal year that might add to complications let alone if the agency had to start preparation for a shutdown or funding glitch due to the Continuing Resolution.”

  • California emissions rules face revocation. The White House plans to revoke the state's federal waiver for setting its own tailpipe-emissions rules, which are stricter than federal ones, further escalating a fight that has challenged the auto industry. The plan leaves intact California’s power to regulate smog-forming pollutants from autos and other sources. California has vowed to fight back and the case could go all the way to the Supreme Court. Meanwhile, the expected Trump administration move has national significance: 13 states — roughly a third of the country’s auto market — follow California’s tighter rules.

  • California GOP Rep. Paul Cook is retiring from Congress to run for a county office instead, continuing the stream of Republican exits from the House. Cook's chief of staff John Stoebel told the Los Angeles Times that Cook plans to run for the San Bernadino County Board of Supervisors.

  • Biden, Warren make gains. The former vice president and Sen. Elizabeth Warren have gained support since the summer in their bid for the Democratic presidential nomination, a new WSJ/NBC poll finds (link). Biden leads with 31%, with Warren at 25% and Sanders at 14%. Warren has gained six points since July, much coming at the expense of Kamala Harris, who is down eight points.

  • Israel’s next prime minister election is very close. Results of the country’s second election this year will be announced but exit polls are inconclusive. Both prime minister Benjamin Netanyahu and his rival Benny Gantz have vowed to lead the next government but may not have the numbers. In a few days, President Reuven Rivlin will give the mandate to form a government to the candidate with the best chance of forming a viable coalition.

  • Tennessee released its draft plan on Tuesday to become the first state to convert its Medicaid program into a block grant. Republican Gov. Bill Lee signed legislation allowing the state to seek federal approval for a block grant earlier this year.

  • FedEx forecast lower profits for the year, citing economic uncertainty from the trade war.

Markets. The Dow on Tuesday rose 33.98 points, 0.13%, at 27,110.80. The Nasdaq added 32.47 points, 0.40%, at 8,186.02. The S&P 500 was up 7.74 points, 0.26%, at 3,005.70.

U.S. Fed meeting conclusion ahead with focus on projections, Fed presser. The conclusion of the Federal Open Market Committee (FOMC) meeting is still expected to see the U.S. central bank trim the target range for the Fed funds rate by 25 basis points even as market expectations for a rate trim have declined. The CME FedWatch tool now only signals 56.5% odds for a rate reduction at today’s meeting conclusion, with 43.5% odds for the Fed to keep rates steady. That compares with one week ago when odds for a 25-basis-point reduction were at 87.7% and no change odds were at 12.3%. Another rate reduction is also likely to meet with another split vote by the Fed — even though two voters were against a rate reduction in July, reports have indicated that several Fed members were not in favor of the rate reduction. Fed Chairman Jerome “Jay” Powell’s post-meeting press conference will be focused on as usual, especially for any hints he may provide on future rate moves. But if the Fed does lower rates, Powell’s characterization of the move will be important. After the July 31 25-basis-point trim to rates, Powell declared it was a mid-cycle adjustment, not the Fed embarking on a series of rate reductions. But Powell is unlikely to shift from his recent mantra — that the Fed will take steps as necessary to sustain the U.S. economy. And, whatever action is taken, Powell will still cite trade uncertainty as a factor the Fed continues to monitor. Updated Fed projections may get as much attention as the Powell presser and rate decision. Traders will look to the projections for signs on future monetary policy actions, particularly the “dot plot” which typically is focused on for where Fed officials expect the Fed funds rate to be ahead.

Japanese August exports fell more than expected. Japanese exports in August were down 8.2 percent compared with year ago on weaker shipments of products like chip-making machines to China and other Asian countries. Expectations were for a 2.3 percent reduction. The fall in exports marked the ninth straight month where Japanese exports have fallen compared with year-ago marks. Japan registered at trade deficit of 136.3 billion yen ($1.26 billion) in August. Exports to China were down 12.1 percent and fell 4.4 percent to the U.S., the first fall in 11 months. This increases expectations that the Bank of Japan will further ease monetary policy ahead, but it is not clear they will take such a step yet when their two-day meeting concludes Thursday.

Friday is quadruple witching day for U.S. markets. When the quarterly expiration of futures and options on indexes and stocks occurs on the same day, surging volatility and trading can follow.


 

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