Possible Energy Crisis is So Evident Even the Fed Should See It
Logistical constraints linger, expand | Tai confers with China counterpart
In Today’s Digital Newspaper
Market Focus:
• Surging energy prices in U.S. and around the world
• Is an energy crisis ahead?
• On Tuesday, IMF expected to estimate slightly lower economic growth in 2021
• Biggest U.S. retailers chartering own cargo ships to import goods
• Delays at U.S. ports and rising freight rates continue to impact supplies
• Number of women on payrolls fell for first time since winter coronavirus surge
• After quiet summer, lumber prices increasing again
• Ag demand update
• Grain and soy futures favoring the upside as crude oil soars
• U.S. Plains and eastern Canadian Prairies and follow-up rain expected midweek
• Cargill shifts some soybean exports to Texas as repairs to Louisiana facilities continue
• Russian wheat exports lagging year-ago by a wide margin
• Prices rising for hogs on China’s spot and futures markets (details below)
• China bought 30,000 MT of pork for its state reserves on Oct. 10
• China bans beef imports from the U.K. after BSE detection
• Strong finish for cattle complex last week
• Sharp drop for pork cutout value on Friday
Policy Focus:
• Reconciliation spending talks do not see much give
• Congressional deadlines ahead
Afghanistan:
• U.S. delegation met with representatives of the Taliban in Doha, Qatar, this weekend
• Severe drought in Afghanistan is compounding the country’s economic crisis
China Update:
• USTR Tai, China’s Liu hold video discussions on trade situation
• Xi Jinping called for a ‘peaceful reunification’ with Taiwan days after show of force
• Chinese property developer Modern Land asks to defer repaying $250 million
• Prices rising for hogs on China’s spot and futures markets
• China bought 30,000 MT of pork for its state reserves on Oct. 10
• China bans beef imports from the U.K. after BSE detection
Trade Policy:
• U.S. businesses panning Biden administration’s new China trade policy
Coronavirus Update:
• People who both had Covid-19 and fully vaccinated don’t need to rush to get boosters
• Merck asks FDA to authorize use of its promising Covid-19 pill
• Impact of gov’t vaccine mandate on USDA’s FSA
Other Items of Note:
• Report: About 25% of all critical infrastructure in U.S. at risk of failure due to flooding
MARKET FOCUS
Equities today: U.S. stock futures are edging lower. Asian equities were mostly higher even as concerns over energy prices remained a factor. Japan’s Nikkei rose 449.26 points, 1.60%, at 28,498.20. Hong Kong’s Hang Seng was up 487.24 points, 1.96%, at 25,325.09. European equities are mostly lower in early trade action. The Stoxx 600 is 0.4% lower with most regional markets seeing losses of 0.3% to 0.7%. British shares, however, are modestly higher.
U.S. equities Friday: The Dow slipped 8.69 points, less than 0.1%, to 34,746.25. The S&P 500 edged lower 8.42 points, 0.2%, to 4,391.34. The Nasdaq fell 74.48 points, 0.5%, to 14,579.54.
All three indexes held on to weekly gains. The S&P 500 and Dow advanced 0.8% and 1.2%, respectively for the week. It was the S&P 500’s best week since August. The Nasdaq added 0.1% for the week.
Stocks
On tap today (see detailed list of events and reports below):
• Chicago Fed President Charles Evans speaks online at 6 p.m. ET.
On Tuesday, the IMF is expected to estimate slightly lower economic growth in 2021 than the 6% it forecast in June. The reduction is based in part on the uneven growth trajectories of wealthy countries and their poorer counterparts. Most advanced economies would return to pre-pandemic levels by 2022 while emerging economies would take “many more years” to recover.
Global supply-chain delays are so severe that some of the biggest U.S. retailers are chartering their own cargo ships to import goods. Port delays, Covid-19 outbreaks and worker shortages have snarled the flow of products between Asia and North America, threatening the supplies of everything from holiday decorations and toys to appliances and furniture. Walmart, Home Depot, Costco and Target are among the companies that are paying for their own chartered ships as part of wider plans to mitigate the disruptions, a costly and unattainable option for most companies. Some of the chains are passing along these added costs by raising prices for shoppers, the WSJ reports (link).
Number of women on payrolls last month fell for the first time since the winter coronavirus surge in December, and the drop was even more pronounced for those ages 25 to 44, who are more likely to have to school-age children. The decline was a major driver behind a slowdown in overall job growth in the country. “Child-care issues are far from resolved,” said Sarah House, senior economist at Wells Fargo & Co., whose own child is home serving a two-week quarantine. “Parents, particularly women, are slow to return to the workforce.” For younger children, many day-care centers have remained closed or lack staff members, providing even fewer options for working parents.
Market perspectives:
• Outside markets: The US dollar index is higher ahead of U.S. trading with the euro slightly weaker against the greenback. U.S. Treasury yields are nearing their March highs. The U.S. bond market is closed for a holiday, but global government bond yields are higher. Gold and silver futures are lower ahead of the U.S. trading start, with gold around $1,755 per troy ounce and silver around $22.58 per troy ounce.
• Crude oil futures have built on earlier gains with U.S. crude trading around $81.80 per barrel and Brent around $84.40 per barrel. Crude prices rose in Asian trading, with U.S. crude up $1.27 at $80.62 per barrel while Brent crude was up 90 cents at $83.29 per barrel.
• Rising energy prices in the U.S. Crude oil has risen 64% this year to a seven-year high. Natural-gas prices have roughly doubled over the past six months to a seven-year high. Heating oil has risen 68% this year. Prices at the pump are up nearly a dollar over the past 12 months to a national average just over $3 a gallon. Coal prices are at records. Higher energy prices could push up inflation in coming months, damp consumer spending on other products and services, and ultimately slow the U.S. recovery, analysts note.
Historically, high energy prices have often preceded recessions. Consumers can’t easily cut consumption on short notice, as they can with discretionary purchases, so higher prices act as a tax, draining the money they have available to spend on other goods and services.
• Is an energy crisis ahead? Consider this:
— No U.S., world energy strategy from current oil system to clean energy
— Need for natural gas as transition as backstop to renewables…wind & solar
— Germany halts nuclear fuel: Was 30% of German’s energy supply
— Russia flexing energy muscle
— Biden energy policy disconnect…
- No to Keystone XL Pipeline; Yes to Russia/Germany Nord Stream 2
- Biden puts limits on fracking
- Biden says no to new drilling/exploration on U.S. federal land
- White House asks OPEC for more production
- Black swan: What if Iran, others attack natural gas production?
• After a quiet summer, lumber prices are increasing again. Prices have jumped 50% since mid-August as inflation has steadily persisted and home prices have continued higher.
• Delays at U.S. ports and rising freight rates continue to impact supplies. Shippers face a lack of cargo containers at the right place for the right price. A shortage of truck drivers in parts of the world add to the problem. “The supply-chain problems are going to stay, leading to substantially higher prices and major dislocations in parts of markets no one is expecting,” said George Ball, chairman of Houston investment firm Sanders Morris Harris. “Almost all segments of the economy that are not pure service or pure technology driven will be struggling with supply-chain issues for a long time.”
“The next supply-and-demand disruption is on the energy front,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management. “We may see further supply issues if energy rationing becomes more widespread.”
“The broader industrials, the food sector and the construction industry have largely been left unscathed and are vulnerable to some more correction to reflect the risks,” Sanders Morris Harris’ Ball said.
• Ag demand: Jordan’s state grains buyer issued an international tender to buy 120,000 MT of animal feed barley.
• CFTC Commitments of Traders report (Source: Barron’s):
• NWS weather: Severe weather and heavy rain over the southern Plains this morning will spread towards the Great Lakes tonight... ...A powerful low pressure system is forecast to bring heavy mountain snow, high winds and freezes to various parts of the West... ...Another severe weather outbreak anticipated for the central to southern Plains on Tuesday.
Items in Pro Farmer's First Thing Today include:
• Grain and soy futures favoring the upside as crude oil soars
• U.S. Plains and eastern Canadian Prairies and follow-up rain expected midweek
• Cargill shifts some soybean exports to Texas as repairs to Louisiana facilities continue
• Russian wheat exports lagging year-ago by a wide margin
• Prices rising for hogs on China’s spot and futures markets (details below)
• China bought 30,000 MT of pork for its state reserves on Oct. 10
• China bans beef imports from the U.K. after BSE detection
• Strong finish for cattle complex last week
• Sharp drop for pork cutout value on Friday
POLICY FOCUS
— Reconciliation spending talks do not see much give. Sen. Bernie Sanders (I-Vt.) said he is holding firm on the $3.5 trillion education, healthcare, child-care and climate plan, while two centrists try to lower the cost and Democratic liberals acknowledge they need to accept less to get the legislation passed.
AFGHANISTAN
— U.S. delegation met with representatives of the Taliban in Doha, Qatar, this weekend. It was the first such meeting since the US withdrawal from Afghanistan at the end of August. The parties discussed the continued safe passage of Americans and American allies from Afghanistan, and the facilitation of humanitarian aid. The State Department said the “candid and professional” discussions covered safe passage of U.S. citizens, other foreign nationals and Afghan partners, the rights of women and humanitarian aid. The Afghan foreign ministry said the two-day meeting “went well.”
— A severe drought in Afghanistan is compounding the country’s economic crisis. The scarcity of water is slashing farmers’ incomes and driving up food bills for people in cities, threatening the livelihood of up to 9 million Afghans, the U.N. estimates. Anger over economic hardship could boil over into unrest, Afghan farmers said. Link to details via the WSJ.
CHINA UPDATE
— USTR Tai, China’s Liu hold video discussions on trade situation. U.S. Trade Representative (USTR) Katherine Tai and Chinese Vice Premier Liu He held discussions via video Friday evening Washington time in which the officials “acknowledged the importance of the bilateral trade relationship and the impact that it has not only on the United States and China but also the global economy.” The two discussed the Phase 1 agreement reached between the U.S. and China, “and agreed that the two sides would consult on certain outstanding issues.”
A readout of the discussion from the USTR said Tai “emphasized U.S. concerns relating to China’s state-led, non-market policies and practices that harm American workers, farmers and businesses.”
From the Chinese side, the Xinhua News Agency said the talks were “pragmatic, candid and constructive” with three issues covered, including that economic relations between the two were “of great importance to the two countries and the world at large” and that they should be strengthened. The second issue raised, Xinhua said, was that they “exchanged views” on the Phase 1 agreement and thirdly “expressed their core concerns and agreed to resolve each other's legitimate concerns through consultation.”
Further, Liu pressed the U.S. on lifting additional tariffs and sanctions and outlined their position on China’s “economic development model and industrial policy.”
Ahead of the call, the USTR office briefed reporters, with a senior official remarking, “We recognize that Beijing is increasingly explicit that it is doubling down on its authoritarian state-centric approach and is resistant to addressing our structural concerns. Therefore, our primary focus will continue to be on building resilience and competitiveness, diversifying markets, and limiting the impact of Beijing's harmful practices."
USTR published its request for comments on the “possible” reinstatement of certain exclusions for Section 301 tariffs (link) Friday, with the comment period opening Tuesday (October 12) through December 1. But clearly China wants more than exclusions but rather the tariffs removed. (See related item under Trade Policy.)
It does not appear any conclusions were reached during the call, the first between Tai and Liu after an initial informal introductory call earlier this year. But there were no expectations there would be any major breakthroughs in the call. The statement from USTR indicated there would be further consultations on “certain outstanding issues” and those discussions will be important to monitor.
— Taiwan faces “unprecedented challenges” and will defend its sovereignty, President Tsai Ing-Wen said, pushing back after Chinese President Xi Jinping declared that unification with Taiwan “will and must be achieved.” Taipei hopes to ease cross-Strait ties, but resolving differences requires dialogue on the basis of parity, Tsai said. She added the government would do its utmost to maintain the status quo and would not act rashly. Beijing said Taiwan’s claim of maintaining the status quo was “an attempt to deceive the world.” The remarks come amid increasing tensions in the region exacerbated by repeated incursions into Taiwan’s air defense identification zone by Chinese planes and the recent revelation that U.S. troops have been training Taiwanese forces for at least a year.
— Chinese property developer Modern Land asked investors for permission to defer repaying a $250 million bond due later this month. China’s property market has run up $5 trillion in debt. Now home sales are down, Beijing is imposing borrowing curbs and buyers are balking at high prices. China has overbuilt its housing sector with “ghost towns” of unoccupied buildings that are now going to be torn down for their iron ore and other building needs and reducing imports of the products. The overbuilding reportedly would house 90 million people.
— Prices rising for hogs on China’s spot and futures markets. China’s live hog futures climbed their daily upside limit of 8% today, with futures prices tracking rising spot prices. Live hog prices on the Dalian commodity Exchange have hit a one-month high of $2,374.44 per metric ton, the biggest intraday gain since the contract launched in January. Government stockpiling of pork and sliding sow inventories have helped stabilize and then lift prices. Ag ministry data shows China’s sow herd fell 0.5% in July and another 0.9% in August, with the July drop marking the first decline in nearly two years. Rosa Wang, an analyst with Shanghai JC Intelligence Co Ltd., told Reuters that “losses are expanding for pig farms as prices had [earlier] dropped too much and to even below 4 yuan per 500 grams in some areas.” Falling hog prices and rising feed costs had caused producers to quickly market pigs, including sows, earlier this year, tightening supply prospects down the road.
— China bought 30,000 MT of pork for its state reserves on Oct. 10. The country also announced plans to buy 7,700 MT of frozen beef and frozen mutton for its reserves on Oct. 13, as well as 800 MT of frozen yak meat.
— China bans beef imports from the U.K. after BSE detection. China’s customs office has banned the import of British beef from cattle under 30 months of age due to a case of bovine spongiform encephalopathy (BSE) in the country during September. The ban took effect Sept. 29. The ban will have little impact as China had yet to restart purchases of British beef after agreeing in 2019 to lift a ban on its beef stemming from BSE cases in the 1990s.
TRADE POLICY
— U.S. businesses are panning the Biden administration’s new China trade policy, saying it fails to provide the tariff relief they expected for importers who lack cost-effective alternatives to Chinese products. The tariffs were imposed by the Trump administration, which gradually expanded the levies to cover most imports from China. The Biden administration has kept them in place, though U.S. Trade Representative (USTR) Katherine Tai said that her office would again allow companies to appeal for exemptions, a process that had mostly expired by the end of last year. USTR said it would consider granting exclusion waivers on 549 product categories, a fraction of the more than 2,200 items that were eligible for tariff relief earlier in the Trump years. Industry groups had hoped the Biden administration would expand the waiver program.
CORONAVIRUS UPDATE
— Summary: Global cases of Covid-19 are at 237,955,133 with 4,853,764 deaths, according to data compiled by the Center for Systems Science and Engineering at Johns Hopkins University. The U.S. case count is at 44,340,408 with 713,354 deaths. The Johns Hopkins University Coronavirus Resource Center said that there have been 401,819,240 doses administered, 187,215,471 have been fully vaccinated, or 57.0% of the U.S. population
— People who both had Covid-19 and are fully vaccinated don’t need to rush to get the boosters now rolling out across the U.S., health experts say.
— Merck asks the FDA to authorize use of its promising Covid-19 pill. Drugmaker Merck has asked U.S. regulators to authorize use of its Covid-19 pill, which it says cuts hospitalizations and deaths by half. If cleared by the Food and Drug Administration — a decision that could come in a matter of weeks — it would be the first pill shown to treat Covid-19 and would add a new and easy-to-use weapon to the world's arsenal against the disease.
— FSA farmer fallout? Farm Journal's Tyne Morgan reports on the government’s vaccine mandate and its impact on USDA Farm Service Agency offices, including elected county committee members. Link
A farmer emailed Pro Farmer and wrote: “The County Committee involvement in this is no doubt controversial. In the past the committees had to also complete many training requirements like full-time employees dealing with discrimination, sensitivity, ethics, etc. This is not the first time the committees had to go through the same hoops as regular employees. I always felt that the FSA county positions are some really good paying jobs with great health insurance, retirement and other benefits. Unless you have a special medical situation, then go find another job if you feel that strongly against vaccines. Nobody is making you work at that local USDA Office.”
OTHER ITEMS OF NOTE
— About 25% of all critical infrastructure in the U.S. is at risk of failure due to flooding, according to a new report (link) from a nonprofit research and technology group. This critical infrastructure includes locations like police and fire stations, hospitals, airports and wastewater treatment facilities. The report also found nearly 2 million miles of road — 23% of U.S. roadways — are already at risk of becoming impassable due to flooding. The threat of flooding is growing rapidly in the U.S. as a consequence of the climate crisis. Areas along the Gulf Coast and Appalachia are especially vulnerable to flood damage.
EVENTS AND REPORTS
Monday, Oct. 11
· U.S. holiday. U.S. federal gov’t offices are closed for the Columbus and Indigenous Day holiday; most markets are to be open normal trading hours — U.S. bond markets are closed.
· IMF & World Bank. The International Monetary Fund (IMF) and the World Bank Group open their 2021 Fall Meeting via webcast. Through Oct. 17.
· India energy issues. United States Energy Association virtual book discussion on "First Fuel: India's Energy Efficiency Journey and a Radical Vision for Sustainability."
