First Republic Bank Taken Over by Regulators and Will Be Acquired by JPMorgan

Dr. Glauber on crop insurance | EPA could delay decision to add electric vehicles to RFS
 

First Republic became the second-largest bank failure in U.S. history. JPMorgan Chase is buying most assets of First Republic Bank in a deal announced after the bank became the third in the U.S. to fail since March. JPMorgan said it had acquired "the substantial majority of assets" and assumed the deposits, insured and uninsured, of First Republic from the FDIC, the independent government agency that insures deposits for bank customers. It makes the lender the second-largest bank failure in the nation's history. The move represents the latest effort by federal regulators to prop up consumer confidence in the banking system, which has now suffered three major bank failures in six weeks. First Republic Bank's 84 offices in eight states are set to reopen as branches of JPMorgan Chase Bank today during normal business hours, the agency said.

Russia launched a fresh round of deadly missile attacks on Ukraine today, resulting in casualties. This comes as Ukrainian officials are signaling that their much-anticipated counteroffensive could be launched imminently while Russia continues to build up its layers of defense. Meanwhile, the head of the Russian private military company Wagner has threatened to withdraw his mercenaries from the embattled city of Bakhmut if they don't receive more supplies from Moscow.

President Joe Biden and Philippine President Ferdinand Marcos Jr. will agree to new guidelines aimed at strengthening military cooperation, said U.S. officials, underscoring a dramatic turnaround in U.S./Philippine relations over the past year. But reports out of Manila say the U.S. deflected the Philippines desire for a free trade agreement after a recent visit with U.S. Trade Representative Katherine Tai.

EPA finally released its summertime E15 decision, and we have some of the impacts in the Energy & Climate Change section. We also note a Reuters item that says EPA may delay its decision to add EVs to the RFS.

On the farm policy front. Dr. Joe Glauber talks about the crop insurance industry and the impacts of some potential changes relative to new farm bill changes.

To raise more crops from the earth, tractor maker Deere is looking to space. The farm-equipment company wants to use satellites to connect farms in remote areas of Brazil and the U.S. as the company rolls out high-tech machinery and software designed to sow and harvest crops more quickly, and with less manpower. Details in Markets section.

China created a black box around its economic data. Guided by President Xi Jinping’s emphasis on national security, authorities in recent months have restricted or cut off overseas access to various databases involving corporate-registration information, patents, procurement documents, academic journals and official statistical yearbooks, the WSJ reports. Of extra concern in recent days: Access to economic and financial data from Wind Information, widely used by analysts and investors both inside and outside the country, appears to be drying up.
 

Equities today: Global stock markets were mostly higher overnight. Some European markets were closed for a holiday. U.S. stock indexes are pointed toward slightly higher openings. In Asia, Japan +0.9%. Hong Kong closed. China closed. India closed. In Europe, at midday, London closed. Paris closed. Frankfurt closed.

     This week brings many corporate earnings reports (see below) and the Federal Reserve’s latest decision on interest rates on Wednesday. Wall Street expects the Fed to raise its benchmark rate by a quarter point. After that, though, observers expect the central bank to ease off on rate hikes as the economy continues to absorb recent aftershocks of the crisis that has now claimed three prominent regional U.S. banks with the seizure of First Republic on Monday.

     Key earnings reports this week include:

• Tuesday: Uber, Restaurant Brands, Pfizer (before the bell); Ford, Starbucks, AMD (after the bell)
• Wednesday: CVS, Yum Brands (before the bell): Qualcomm (after the bell)
• Thursday: Moderna, Paramount Global (before the bell); Apple (after the bell)
• Friday: Warner Bros. Discovery (before the bell)
• Saturday: Berkshire Hathaway
   

     U.S. equities Friday: The Dow rose 272 points, or 0.80%, at 34,098.16. The S&P 500 index posted a gain of 34.13 points, 0.83%, at 4,169.48, while the Nasdaq index advanced 84.35 points, 0.69%, at 12,226.58.

     For the week, the Dow gained 0.9%, and 2.5% for the month, its highest percentage gain in a month since January. The S&P 500 rose 0.9% for the week and 1.5% in April, while the Nasdaq gained 1.3% for the week and ended the month nearly unchanged.

Agriculture markets Friday

• Corn: July corn futures rose 3 1/2 cents on the day to $5.85 but posted a weekly loss of 30 1/4 cents and fell 51 cents on the month.
• Soy complex: July soybeans rose 15 1/2 cents to $14.19 1/4, nearer the session high, but down 29 1/2 cents on the week. July meal rose $5.00 to $432.40, down $11.20 from a week-ago, while July soyoil rose 84 points to 51.67 cents, a 190-point week-over-week decline.
• Wheat: July SRW wheat futures rose 4 1/2 cents to $6.33 3/4 after hitting a 22-month low early Friday. For the week, July SRW lost 39 1/4 cents. July HRW wheat futures rose 11 cents to $7.76 1/4 and nearer the session high. Prices hit a 13-month low early Friday and for the week fell 49 1/4 cents. July HRS wheat rose 18 3/4 cents to $8.03 3/4, a 42 cent drop on the week.
• Cotton: July cotton rose 40 points to 80.80 cents and gained 65 points on the week.
• Cattle: April live cattle futures dove just before expiration after trading around $177.00 through much of Friday’s session and went off the board 27.5 cents lower at $175.175. Nearby June ended the day at $165.475, up 27.5 cents on the day and up 95 cents on the week. May feeder futures fell 55 cents to $210.975, with the closing price representing a weekly decline of $1.425.
• Hogs: June lean hog futures rose $1.60 to $91.70 and hit a three-week high. For the week, June hogs gained a solid $5.525. r
   

Ag markets today: Wheat futures faced pressure overnight, while corn was mostly weaker and soybeans favored the upside. As of 7:30 a.m. ET, corn futures were trading fractionally to 2 cents lower, soybeans were mostly 1 to 2 cents higher and wheat futures were 8 to 10 cents lower. Front-month crude oil futures were around $1.75 lower, and the U.S. dollar index was about 150 points higher.  

Market quotes of note:

• By the end of Friday, First Republic’s stock was down 97% for the year and major banks were circling to pick up the pieces in case the company went into receivership. JPMorgan Chase emerged as the buyer after several banks reportedly made bids. First Republic clients at 84 branches throughout the U.S. will now be JPMorgan customers, and they’ll have “full access to all of their deposits,” according to the FDIC. For its part, JPMorgan sees the acquisition as a positive. “This acquisition modestly benefits our company overall, it is accretive to shareholders, it helps further advance our wealth strategy, and it is complementary to our existing franchise,” CEO Jamie Dimon said.
  
  
   
• One of the side-effects of Russia’s invasion of Ukraine could be a real “gamer changer” for India’s economic policy, according to Charles Gave, founder of research group Gavekal. With few domestic energy sources, India’s current account widens when the economy picks up steam and draws in more imports of oil and gas denominated in dollars. That’s meant repeated brushes with balance-of-payments crises over the decades. But if India pays in rupees for Russian energy — as Moscow cannot receive dollars — that changes everything. In time this should help stabilize the rupee, encouraging global capital flows toward India’s infrastructure build-out. Long-term interest rates should go down, “growth stocks and real estate should boom” and as the bond market gets more liquid, that will pull in yet more capital. “Talk about unintended effects,” Gave wrote in an April 27 note.
   
• The U.S. commercial property market is headed for some rough times, according to Berkshire Hathaway’s Charlie Munger. “It’s not nearly as bad as it was in 2008,” he told the Financial Times, referring to the housing meltdown and subsequent financial crisis of that era. “But trouble happens to banking just like trouble happens everywhere else.” Munger said banks are loaded up with “bad loans” that will be vulnerable if the economy hits a bad patch. “A lot of real estate isn’t so good anymore,” Munger added, according to the FT. “We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.”
   

On tap today:

     • S&P Global's U.S. manufacturing index for April is expected to rise to 50.4 from a preliminary reading of 49.0. (9:45 a.m. ET)
     • Institute for Supply Management's manufacturing index is expected to rise to 46.7 in April from 46.3 one month earlier. (10 a.m. ET)
     • U.S. construction spending for March is expected to be unchanged from the prior month. (10 a.m. ET)
     • USDA Weekly Grain Export Inspections report, 11 a.m. ET.
     • USDA Crop Progress report, 4 p.m. ET.

U.S. regulators said First Republic Bank has been seized and a deal agreed to sell the bank to JPMorgan, in what is the third major U.S. institution to fail in two months. The Wall Street bank will take most of First Republic's assets and all the deposits, including uninsured ones.

Another quarter-percentage point increase in the Fed Funds rate this Wednesday would lift the benchmark fed-funds rate to a 16-year high. Until now, officials have been looking for clear signs of a slowdown and easing inflation to justify an end to rate rises. But after this week, that could flip. Officials could need to see signs of stronger than expected growth, hiring and inflation to continue raising rates.

An unyielding building boom is providing a strong foundation for an otherwise shaky-looking U.S. economy. Construction spending and employment have risen to new records this year, boosted by government outlays for infrastructure, a domestic manufacturing renaissance and a wave of apartment building. Construction jobs from airport overhauls to bathroom renovations are helping boost employment, the Wall Street Journal reports (link),  and giving momentum to industrial supply chains in an economy coping with brittle consumer demand. Construction-equipment maker Caterpillar recently reported sharply stronger sales and operating margins, one sign of how the boom is reaching suppliers. Still, there are slowdown signals in logistics networks. Spot prices for flatbed truck transport have slipped from last year’s high levels, load board DAT Solutions reports. And rail transports of lumber and wood products fell 6.4% in the first quarter, according to the Association of American Railroads.

France’s credit rating was cut by Fitch Ratings in another blow to President Emmanuel Macron as he tries to bolster the country’s public finances with unpopular overhauls.

Deere seeks satellite network to connect far-flung farms. To raise more crops from the earth, tractor maker Deere is looking to space. The farm-equipment company wants to use satellites to connect farms in remote areas of Brazil and the U.S. as the company rolls out high-tech machinery and software designed to sow and harvest crops more quickly, and with less manpower. Deere, which had $52.5 billion in revenue last year, wants to generate 10% of its annual revenue by the end of the decade from software fees for using driverless tractors, smart crop sprayers and other enhancements for its farm and construction equipment. Link to more via the Wall Street Journal.

Market perspectives:

     • Outside markets: The U.S. dollar index was slightly higher, with most foreign rival currencies weaker against the greenback. The U.S. dollar has fallen about 8.6% in international currency markets from a peak last September. The dollar is experiencing its worst start to the year since 2018. Investors are betting the U.S. currency has further to fall as the Federal Reserve nears the end of its most aggressive program of interest-rate increases since the 1980s, the WSJ reports (link). The yield on the 10-year U.S. Treasury note was slightly higher, trading around 3.48%, while many global government bond markets were closed for a holiday. U.S. crude futures were under significant pressure, with U.S. crude around $75.10 per barrel and Brent around $78.75 per barrel. Gold and silver were mixed, with gold futures weaker around $1,997 per troy ounce and silver firmer around $25.56 per troy ounce.

     • Oil prices dropped as jitters over the economic impact of the US Federal Reserve potentially raising interest rates and weaker Chinese manufacturing data were enough to outweigh support from new OPEC+ supply cuts taking effect this month.

     • 1,820,530: International containers moved in U.S. intermodal networks in the first quarter, down 8.8% from the same quarter last year, according to the Intermodal Association of North America.

     • NWS weather outlook: Heavy rain to continue across northern Maine through Monday, as areas further south begin to clear out... ...Heavy snow will persist across Upper Peninsula of Michigan through early work week; Well-below-average temperatures across Great Lakes and Ohio Valley through Tuesday, spreading into Northeast and Mid-Atlantic on Wednesday... ...Cool and unsettled weather spreads into the West Coast, while well above average temperatures continue across the Intermountain West, northern/central Rockies, and northern High Plains.

Items in Pro Farmer's First Thing Today include:

     • Wheat futures drop overnight
     • Cool week ahead for Corn Belt
     • Record March soybean crush expected
     • Cautious trade likely to continue in cattle futures
     • Cash hog index starting to firm

— U.S. struggles to replenish munitions stockpiles as Ukraine war drags on. More than a year after Russia’s full-scale invasion of Ukraine, U.S. plans to increase production of key munitions have fallen short due to shortages of chips, machinery and skilled workers. Years of stop-start Pentagon funding for munitions led companies to close production lines or quit the industry, while output of many components and raw materials moved overseas. Defense Department chiefs estimate the decline will take five or six years to reverse, the WSJ reports (link).

— Ukraine grain exports running behind year-ago. Through the first 10 months of the 2022-23 marketing year, Ukraine exported 41.6 MMT of grain, 4.3 MMT (9.4%) behind year-ago. That total included 24.4 MMT of corn, 14.4 MMT of wheat and 2.5 MMT of barley.

— A deal was reached that would allow the transit of Ukrainian grain to resume through five neighboring EU countries. Restrictions were imposed by Poland and Hungary, as well as Romania, Bulgaria and Slovakia, after much of the produce ended up in their local markets and crashed prices for local farmers. Not many details of the agreement have been revealed, but it covers wheat, corn, rapeseed and sunflower seeds, and includes a financial support package worth €100M for farmers. "I welcome the agreement in principle," tweeted European Commission President Ursula von der Leyen, adding that it "preserves both Ukraine’s exports capacity so it continues feeding the world, and our farmers' livelihoods."
 

— DMC payments triggered for March. Prices will trigger payments under the Dairy Margin Coverage (DMC) program for March with the national average margin at $6.08 per hundredweight (cwt).

     Dairy operations selecting Tier 1 margin coverage levels of $6.50, $7, $7.50, $8, $8.50, $9, and $9.50 per cwt. will receive payments while those with Tier 2 coverage levels at $6.50, $7, $7.50, and $8 per cwt. will be issued a payment. Payments range from 42 cents per cwt. for $6.50 coverage levels up to $3.42 per cwt. for $9.50 coverage, increasing by 50 cent increments for coverage levels between those marks.

     DMC payments have been triggered each month this year with the national average margin at $7.94 per cwt. in January and $6.19 per cwt. in February.

— Dr. Joe Glauber on U.S. crop insurance. Glauber is a former top USDA economist and a noted expert on crop insurance. He is now at the IFPRI. With suggested changes to the crop insurance program relative to the new farm bill debate, we asked Glauber about the industry and some potential implications of changes. Here is Glauber’s response:

     “The actuarial performance of the federal crop insurance program has improved significantly over the past 30 years. Think back to the 1980s when the program had a loss ratio greater than one almost every year. Over the period 1981 to 1994, losses exceeded total premiums (ie, including subsidies) by 50%. Over the past 20 years, the loss ratio has been closer to 0.8. Why the big difference? I would argue two major factors. The first is improved ratemaking and underwriting, based on the accumulation of farm level data. RMA should be given a lot of credit here. But perhaps even more important, the heavy premium subsidization that came with the 1994 Act and 2000 ARPA had a dramatic effect on participation. That effectively "solved" the adverse selection program by bringing everyone into the program. Its still far from perfect. Some crops like tobacco and cotton have much higher loss ratios than crops like corn and soybeans. RMA tries to adjust the rates every two to three years based on historical loss experience, but rates in some regions are far below ‘target’ loss ratios (rates needed to reach actuarial soundness). RMA is limited by caps on rate increases and there still is a lot of political pressure from within and without to avoid big rate increases.

     “How disaster programs would affect actuarial performance would depend a lot on how such programs were designed. Many producers could opt to drop crop insurance coverage if they thought they would be covered by disaster. In the late 1980s and 1990s, ad hoc disaster programs were designed so as not to discriminate against those who purchased insurance so many insured farmers collected two checks for the same loss (a crop insurance indemnity plus a disaster payment). In a couple of years, you got a bigger disaster payment if you were insured and many of the ad hoc bills required an uninsured producer to buy insurance the following year.

     “A big concern would be if the disaster program encouraged moral hazard thus increasing losses for both the disaster program and crop insurance. I think that particularly becomes a danger as coverage levels get pushed up near 100% coverage. Deductibles (and copayments) play an important role in any insurance contract in trying to minimize moral hazard issues.”

— WSJ: China locks information on the country inside a black box. China is creating a black box around information on the world’s second-largest economy, alarming global businesses and investors, the WSJ reports (link). Prodded by President Xi Jinping’s emphasis on national security, authorities in recent months have restricted or outright cut off overseas access to key databases. The approach is part of a broader effort to tighten the Communist Party’s control on how the rest of the world forms its views on China, the WSJ concludes.

     What does the data still tell us? Activity in China’s services sector grew at a healthy pace in April, a sign that Chinese consumers continue to drive the country’s economic rebound. China’s official purchasing managers index for services and construction came in at 56.4 in April, a weaker reading than March’s 58.2 level but still comfortably above the 50 mark that separates expansion from contraction.

— China’s factory activity unexpectedly shrinks in April. China’s official manufacturing purchasing managers index (PMI) unexpectedly fell to a four-month low of 49.2 in April, down from a reading of 51.4 in March. That marked the first contraction in China’s vast manufacturing sector since December. New orders and buying activity contracted after rising in the prior three months, while export sales fell for the first time since January.

— Impact of EPA E15 summertime ethanol use: not much. Back-of-envelope analysis: The RFA said the 2022 waiver resulted in 194 million gallons of additional E15 sales — 15% ethanol and 85% gasoline. 15% of 194 million gallons would be 29.1 million gallons of ethanol. If you assume that the 194 million gallons would have been E10 if not for the waiver, that means that it resulted in 9.7 million gallons of additional ethanol sales.

— The Environmental Protection Agency could delay a decision to add electric vehicles to the Renewable Fuel Standard that would give EV manufacturers like Tesla Inc. tradable credits for using electricity generated from renewable fuels, Reuters reported (link), citing two sources familiar with the matter. The threat of expected legal challenges from the proposed rule is drawing concern from the Biden administration, which is expected to finalize the regulation by June 14.

     Background: EPA in its proposed RFS levels for 2023-2025 had recommended that EV makers get the eRINs that would be available for power generated from renewable natural gas or agricultural methane. EPA has agreed to finalize the 2023-2025 RFS levels by June 14 and so far, the final plan has not yet been sent forward to the Office of Management and Budget (OMB) for their review, a required step in the regulatory process. That review could take up to 90 days, but with the June 14 deadline, the expectation is OMB will not take the full time it could to review EPA’s final plan. Reuters speculated that EPA could shift some of the expected volume mandates under its plan to other areas such as renewable diesel and sustainable aviation fuel (SAF).

— Brazil to study raising gasoline blend to E30. Brazil will create a working group to study raising the mandatory blend of ethanol content in gasoline to 30% from the current 27%. The government would first have to raise the ceiling of the permitted ethanol content in gasoline, which currently ranges from 18% to 27.5%. Brazil Energy Minister Alexandre Silveira said, “Increasing the ethanol content will undoubtedly contribute to our country’s energy security, by reducing gasoline imports and to the energy transition, by reducing greenhouse gas emissions.”

— All medium- and heavy-duty trucks vehicles sold in California in 2036 must be zero-emission, according to a new rule approved by the California Air Resources Board, which will also mandate that all trucks be zero-emissions by 2042. The rule follows last year's adoption of a regulation requiring that by 2035, all new vehicles sold in the state must be electric or plug-in hybrids.

— As Biden heads into re-election fray, voters give economy a C+. With President Joe Biden officially launching his re-election campaign last week, a new Morning Consult survey finds that despite signs of improvement in inflation and labor market tightness, voters' view of the economy's performance — a C+ — hasn't changed since last year. Furthermore, prior to the folding of First Republic Bank over the weekend, more than one-third of voters said in the survey they believe the failures of Silicon Valley Bank and Signature Bank are a bad sign for the U.S. economy.

— Crypto sector oversight. House Rep. Patrick McHenry (R-N.C.), chair of the House Financial Services Committee, said the committee will team with the House Agriculture Committee to present legislation to oversee the crypto sector in the "next two months," following public hearings on the matter that are set to begin this month.  
 

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