The Week Ahead: August 28-September 3, 2017

Posted on 08/28/2017 4:46 AM

Harvey impacts mount | Tax reform | Employment | NAFTA 2.0 talks resume  



A monumental disaster is taking place in parts of Texas and it is already impacting Washington, with President Donald Trump slated to visit the flood-devastated region on Tuesday. Texas has the second-largest economy in the nation after California and accounts for about 9% of U.S. gross domestic product.

Some 5,000 national and state guard troops are being deployed to assist with relief and recovery efforts as Houston and surrounding areas in Texas try to cope with the Hurricane Harvey's aftermath. Texas Gov. Greg Abbott (R) said in a news conference that relentless rain and dire flash flooding have produced the strongest storm the state has seen in at least 50 years. Parts of Texas had already recorded more than 27 inches of rainfall by 9 am local time on Sunday, according to the National Weather Service (NWS), with South Houston seeing almost 25 inches. Emergency crews rescued more than 1,000 people from cars and homes in the Houston area on Sunday. Heavy rains were forecast to continue for days, with as much as 50 inches falling in some places.

The NWS has said there have been reports of as many as five deaths. The service issued a statement that the storm was “catastrophic.”

“The recovery to this event is going to last many years, to be able to help Texas and the people impacted by this event achieve a new normal,” said newly appointed Federal Emergency Management Agency (FEMA) director, William "Brock" Long.

Nearly a quarter of Texas' population lives in areas covered by a federal disaster declaration .Gov. Greg Abbott said 18 counties are now covered by the disaster declaration approved by President Trump. There are nearly 7 million people in those counties, including the nation's fourth-largest city of Houston. Texas has a population of 27.8 million.

Weather update: As of 10 p.m. CT August 27, Harvey was moving slowly eastward or east-southeastward, while bands of heavy rainfall have continued to form over the northwestern Gulf and train inland over much of the upper Texas coast and southwestern Louisiana. "Storm total rainfall amounts in the 20-27 inch range are quite common in the Greater Houston area, and additional rainfall amounts of 15 to 25 inches are expected over the next several days," according to the National Weather Service (NWS) National Hurricane Center (NHC). "Rainfall total could reach 50 inches in some locations, which would be historic for that area."

Expectations are now that Harvey will move just offshore of the Texas coast today, then turn northward and moving inland over northeastern Texas by 72 hours. All of the global models show some slight deepening of the system after it moves over water, but given the lack of an inner core, significant strengthening is not anticipated. "Ongoing catastrophic and life-threatening flooding will continue across southeastern Texas," the NHC said.

As for other areas of Texas, the NHC said Harvey is expected to produce total rain accumulations of 5 to 15 inches farther south into the middle Texas coast, farther west toward the Texas Hill Country, and farther east across south-central Louisiana.

What is behind these hefty precipitation amounts is what is called a "feeder band"— a situation where it is in position to pull moisture-laden air off the Gulf.

Link to access the NHC forecast for Tropical Storm Harvey.

Market impacts: Energy market volatility is already evident as gasoline futures shot up in electronic trading Sunday evening. Today, U.S. crude futures traded up 17 cents, 0.36%, to $48.04 a barrel. The actions took out nearly 15% of U.S. fuel-making capacity, or more than 2 million barrels a day. Both Houston airports were closed today as some companies sought to truck in relief supplies to accessible areas. Experts expect supply chains to rebound fairly quickly once roads and ports reopen, but the region is bracing for several more days of epic rains, pushing back any prospects for recovery. Gasoline futures rose more than 7% on the New York Mercantile Exchange on supply concerns, while a barrel of West Texas Intermediate oil for October delivery slipped to $47.40 and its discount to the international benchmark Brent widened to the biggest in two years.

Energy distribution capabilities and infrastructure issues will be closely watched topics. With rain expected to continue until at least Tuesday, it is unclear how long plants will stay closed. That could raise concerns about fuel shortages and price spikes, but White House officials indicated warnings about this potential development. Roughly a million barrels a day of refining capacity were shut down on the Gulf Coast, and nearly a quarter of gulf offshore production has been shut. The Corpus Christi shipping terminals responsible for importing and exporting oil and refined products are also closed. And if the ship channel between Port Aransas and Aransas Pass is badly damaged, observers said it could take weeks for products to leave South Texas refineries, even if the plants are not much impacted.

The East Coast, which gets much of its fuel from the Gulf, has relatively high levels of fuel in storage. Commercial storage tanks in the region hold more than 63 million barrels of gasoline, compared with about 52 million barrels before Hurricane Katrina.

International repercussions could be more evident as U.S. fuel has become an important supplier of fuel around the world. Some 17% of gasoline and 39% of the diesel fuel produced by Gulf Coast refiners has been exported this year, according to consultancy Turner, Mason & Co.

Agriculture is a major part of the western Gulf Coast economy, and cotton and rice producers have been rushing to harvest their crops ahead of Harvey — a majority of the rice is already harvested. "Hopefully producers have been able to get most of the remaining rice acreage out of harm's way in advance of the storm," said USDA meteorologist Brad Rippey. The Texas rice harvest was about 70% complete through Aug. 20, according to the last USDA estimate, with some estimating the current state harvest pace is around 85%. USDA said Friday that harvest activity was suspended due to the approaching storm/hurricane. Ag shipments have been interrupted along the Texas coast, which represents almost one-quarter of the nation's wheat exports.

Also, heavy winds from the storm could cause damage to some of the harvested rice now in bins. Also, levees could break and cause additional problems.

As for Texas cotton, Michael Klein, a spokesman for the USA Rice Federation, told CNBC that the cotton crop “in this area of Texas is the biggest and most beautiful that anyone can remember in years, and probably two-thirds of it is still in the fields. It's going to be disastrous for them." USDA last Monday estimated only 9% of the Texas cotton crop was harvested. Texas is the largest U.S. cotton producer and many farmers were expected to store excess supplies in fields following a bumper harvest.

Flooding will disrupt wheat shipments through ports in Houston and Corpus Christi and impact grain elevators in the area, according to the Texas Wheat Producers Board. Most of the state’s wheat-growing areas was not expected to be impacted by the rain.

Ports at the Texas Gulf account for about 24% of U.S. wheat exports, 3% of corn shipments and 2% of soybeans, according to the Soy Transportation Coalition, citing data from USDA The bigger threat to shipments of corn and soybeans, the top U.S. crops, comes from Harvey’s potential impact in Louisiana and the Gulf of Mexico. About 60% of American soybean exports depart from that region, as do 59% of corn shipments, said Mike Steenhoek, the group’s executive director, according to Bloomberg.

Some initial impacts have been on livestock needing to be evacuated to higher ground, with reports indicating scores of trailers were exiting the region ahead of the storm and in the initial stages.

Damages from Harvey are estimated to be well below those from other major storms that have hit New Orleans and New York, according to one of the world's largest reinsurers. Hannover Re said that insured losses for Katrina in 2005 were around $80 billion, while losses from Sandy in 2012 were $36 billion.

President Trump will be in Springfield, Mo., on Wednesday, where he will deliver remarks touting his plans to revamp the tax system. "Tax reform and tax relief for the middle class certainly will be a big priority for the administration" this fall, White House Press Secretary Sarah Sanders said. It's something "you'll see us put a lot of focus on.

The best way to get at money that companies have parked overseas to avoid paying taxes on it is a "one-time deemed tax” according to House Speaker Paul Ryan (R-Wis.). This would be a mandatory tax that companies would have to pay, regardless of whether they actually repatriate the money to the United States. Ryan reiterated that the GOP still wants to incentivize home ownership, charitable giving and saving for retirement through the tax code but said the current tax provisions in those areas can be altered, though he avoided specifics.

Ryan dismissed talk of a tax overhaul being temporary because of limitations the budget reconciliation rules create. "We very passionately believe that permanence is very, very important,” Ryan said on CNBC, noting the House Ways and Means and Senate Finance Committees both share that belief.

“Our goal is to get this done this year in 2017," Ryan said about the GOP's timeline for completing a tax overhaul.

Ryan also predicted that a tax overhaul will help the GOP achieve a 3% growth target many lawmakers have started talking in recent months.

Tax reform talk eclipses Fed head Yellen. Federal Reserve Chairwoman Janet Yellen’s speech at Jackson Hole, Wyoming, on Friday was supposed to be the event of last week, but instead was overshadowed by tax-reform talk. On Friday, stocks and Treasuries rose after a speech by Yellen was less hawkish than some expected.

The economic report most anticipated this week comes Friday when the Labor Department releases its date on U.S. employment for August. Economists are projecting an increase in payrolls of 180,000 and the unemployment rate staying at 4.3%.

Wage rates will be of particular interest. In the 10 years through June, which includes the 2008-2009 recession, average hourly earnings of all employees on private nonfarm payrolls rose nearly 10% faster than inflation; over the past five years, nearly 6% faster. But nominal gains have been in the 2% range. Some analysts expect average hourly earnings growth of all employees to rise to 4% annually from the current 2.5%. Federal Reserve officials of course have a keen interest regarding this topic.

Meanwhile, the Fed is still looking to shrink its balance sheet, and perhaps hike interest rates again this year. This Friday’s U.S. payrolls report could go help traders determine whether the Fed will hold steady — as the futures market is currently predicting — or keep on tightening.

In the coming days, we will also get revised GDP, Core PCE inflation, personal income and spending, and manufacturing numbers.

Yellen countered Republican criticism that financial regulation is impeding economic growth. In her remarks Friday, Yellen said changes since the global financial crisis, which began a decade ago, have significantly improved the resilience of the financial system. "The events of the crisis demanded action, needed reforms were implemented and these reforms have made the system safer," Yellen said in remarks at the annual monetary policy conference. "Already, for some, memories of this experience may be fading -- memories of just how costly the financial crisis was and why certain steps were taken in response," Yellen said.

Yellen's four-year term as Fed leader ends in February, and President Trump has said he is considering whether to name someone else in her place. Gary Cohn, Trump's chief economic adviser, whom Trump has described as a candidate for Yellen's job, is an architect of the administration's regulatory plans.

Yellen said large banks have shifted to a more stable mix of financing. The share that comes from equity investors, known as capital, has roughly doubled, while the share that comes from the least stable source, short-term wholesale borrowing, has decreased roughly by half. "Reforms have boosted the resilience of the financial system," she said. "Banks are safer." She said several indicators suggest that investors share the Fed's assessment.

Yellen said there was no clear evidence that increased regulation had been causing broad or deep reductions in the availability of loans, but she said it was more difficult to assess whether there might be smaller impacts. "Credit may be less available to some borrowers, especially home buyers with less-than-perfect credit histories and, perhaps, small businesses," she said.

She noted the Fed was committed to reviewing the impact of regulations and that it saw specific areas with room for improvement. Fed officials have said repeatedly that they would like to reduce the regulatory burden on smaller financial institutions. "The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system," she said.

Yellen said regulators also should review restrictions on investment activity by banks, including the so-called Volcker Rule that limits speculative investments, but she rejected the idea that there is a need for broad reductions in regulation. "Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years," Yellen said.

NAFTA 2.0 talks move to Mexico City. Trade officials from Canada, Mexico, and the U.S. this week gather in Mexico City for Round Two of talks to renegotiate the North American Free Trade Agreement (NAFTA 2.0). New proposals and counter offers are expected as the parties want to get as much text on the table as possible in September so that they can wrap up close to the end of the year. The three NAFTA parties are stressing confidentiality in the closed-door talks taking place Sept. 1-5. NAFTA parties recently inked a confidentiality accord, agreeing not to leak proposals they will offer in the talks.

The issue of rules of origin for automobiles and auto parts is a key focus ahead as U.S. Trade Representative Robert Lighthizer said the U.S. would be seeking “substantial” national content and an increase in North American content in rules of origin. Labor unions support the move, but U.S. automakers will be watching for what, if any, numerical thresholds will be offered by the U.S. as they have built supply chains relying on the current NAFTA rules.

President Trump again tweeted on Sunday about NAFTA, calling it the "worst trade deal ever made" in and saying the U.S. might have to just "terminate" the pact because Mexico and Canada were being difficult in renegotiation talks. He also commented on his determination to build a wall along the U.S.' southern border and to make Mexico pay for it eventually. He didn't elaborate on how he would do so — "through reimbursement/other" — but he did accuse Mexico of being one of the highest crime nations in the world.

On the agriculture report front, the International Cotton Advisory Committee releases its monthly supply and demand report on Friday.

On the international front, today French President Emmanuel Macron hosts a summit in Paris with Germany’s Angela Merkel and Spain’s Mariano Rajoy. Also today, talks will resume on Britain’s exit from the European Union. This week’s third-round talks will address Northern Ireland, but a senior EU official has already warned that the peace process in the region “must not be a bargaining chip in these negotiations.”


 

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