Russian Forces Targeted At Least Two Large Grain Terminals

Powell: Higher interest rates could cause a recession

Today’s dispatch is abbreviated as I am in St. Louis, ahead of a family reunion of sorts in the Ozarks.

Equities: Global stock markets were mixed overnight, with European shares mostly down and Asian shares mostly up. U.S. stock indexes are pointed toward firmer openings. In Asia, Japan +0.1%. Hong Kong +1.3%. China +1.6%. India +0.9%. In Europe, at midday, London flat. Paris -0.1%. Frankfurt -0.9%.

Markets: Sinking commodities mean one element of the inflation story is in retreat. Raw materials are starting to take talk of a looming recession seriously, with oil, copper and wheat prices leading the Bloomberg Commodity Index lower for a fourth day. The U.S. dollar index is firmer in early trading. The yield on the 10-year U.S. Treasury note is fetching 3.141%. U.S. crude is around $106.25 per barrel and Brent around $108.70 per barrel. Gold and silver futures are lower, with gold around $1,830 per troy ounce and silver around $21.10 per troy ounce.

Ag markets: Mounting recessionary concerns triggered heavy liquidation pressure in the grain and soy markets overnight. As of 7:30 a.m. ET, corn futures were trading 11 to 19 cents lower, soybeans were 35 to 38 cents lower and wheat futures were mostly 14 to 20 cents lower. Front-month U.S. crude oil futures were around 50 cents lower and the U.S. dollar index was more than 400 points higher this morning.

Ag trade: Japan purchased 168,330 MT of wheat in its weekly tender, including 59,080 MT U.S., 63,820 MT Canadian and 45,430 MT Australiana. Saudi Arabia tendered to buy 480,000 MT of wheat.

EIA to delay oil, ethanol data. The Energy Information Administration (EIA) said Wednesday that product releases scheduled for the week of June 20 will be delayed due to “systems issues.” The agency said they are working on a “solution to restore the affected systems.” While the Weekly Natural Gas Storage Report will be released today, “all other data releases scheduled for this week will be delayed.” The weekly oil inventory, ethanol production and stocks figures were to have been released today (June 23) due to the Monday U.S. holiday, but it is unclear when the data for the week ending June 17 will be released.

Dallas Cowboys owner wins big. Booming LNG exports and high gas prices have made Dallas Cowboys owner Jerry Jones’s stake in Comstock Resources worth about $2.6 billion, more than twice what he invested four years ago.

Russia/Ukraine: A pivotal showdown is approaching in eastern Ukraine as more villages fall to Russia. Although Russian forces have pummeled the Ukrainian port city of Mykolaiv since the beginning of the war, the city has become a linchpin of Ukrainian defiance on the southern front. Meanwhile, the arrival of Western weapons has begun to reshape the battle off Ukraine’s coast. Gaining full control of Severodonetsk would lay an important marker in Moscow’s goal of seizing all of Donbas. Russian forces have made slow gains, at heavy costs to both sides.

Russian forces Wednesday targeted at least two large grain terminals — one owned by a U.S. company and one by a Canadian company —I n the port of Mykolaiv, part of what Kyiv and Western governments say is a campaign to degrade Ukraine’s ability to export food. Russia, meanwhile, says it is considering a U.N.-backed deal to extract grain blockaded in Ukrainian ports. See related item below.

U.S. urges countries to seek its help with food, fertilizer imports from Russia. Countries should ask for help if they have any problems importing Russian food and fertilizer, a senior U.S. official said on Wednesday, stressing that such goods were not subject to U.S. sanctions over Moscow’s war in Ukraine. “Nothing is stopping Russia from exporting its grain or fertilizer except to own policies and actions,” U.S. State Department Bureau of Economic and Business Affairs Assistant Secretary, Ramin Toloui, said. But he added that concerns had been raised about “so-called over compliance with sanctions.” Facilitating Russian grain and fertilizer exports is a key part of attempts by United Nations (U.N.) and Turkish officials to broker a package deal with Moscow that would also allow for shipments of Ukrainian grain from the Black Sea port of Odesa. “We are fully supportive of this and want to see that play out,” Toloui said of the U.N. efforts. “We’ll continue close coordination with the U.N. delegation and the government of Ukraine on ways to mitigate the impacts to global food security of (Russian President Vladimir) Putin’s war in Ukraine.”

Turkey investigating claims Russia stole Ukrainian grain. Turkey is investigating claims that Ukrainian grain has been stolen by Russia and says it would not allow any such grain to be brought into the country. Kyiv’s ambassador to Ankara said in early June Turkish buyers were among those receiving grain that Russia had stolen from Ukraine. The Kremlin reiterated its assertion that Russia has not stolen any grain from Ukraine.

Russia is ramping up hacking attacks on Ukraine’s allies, Microsoft researchers say. About 128 targets in 42 countries have been hit by Kremlin-directed cyberattacks since the war began, with the U.S. topping the list, they say. The increase in attacks was expected, but they have been less successful than security experts initially predicted.

Powell: Higher interest rates could cause a recession. Federal Reserve Chairman Jerome Powell said the central bank’s battle against inflation could lead it to raise interest rates high enough to cause a recession. “It’s not our intended outcome at all, but it’s certainly a possibility,” Powell said Wednesday during the first of two days of congressional hearings. “We are not trying to provoke and do not think we will need to provoke a recession, but we do think it’s absolutely essential” to bring down inflation, which is running at a 40-year high. His remarks underscore the challenge facing the central bank as it raises interest rates at the most rapid clip since the 1980s to slow the economy and cool inflation.

     Powell will return to Capitol Hill this morning for the second of two days of testimony, this time before the House Financial Services Committee.

     The blame game: Liberal Sen. Elizabeth Warren (D-Mass.) warned Powell that Democrats will blame him for a recession.

     Meanwhile, Philadelphia Fed President Patrick Harker said the U.S. economy might see a modest contraction in growth. And Chicago Fed President Charles Evans said after Powell's testimony that another 75-basis point hike is a "very reasonable place to have a discussion" in the July FOMC meeting.

Federal Reserve today will release the results of its 2022 bank stress tests, which were established under Dodd-Frank regulations following the global financial crisis. All 34 U.S. banks with over $100 billion in assets will be checked against a series of doomsday scenarios to ensure their balance sheets can withstand a hypothetical downturn. The results — which will particularly focus on stress in commercial real estate and corporate debt markets — come amid growing fears of a looming recession, meaning an economic spiral may not be all that hypothetical.

     Background: The annual health checks dictate the required size of each bank's "capital buffer," which refers to the extra cushion of capital that's set aside on top of the regulatory minimum needed to support daily business. The checks also determine how much lenders can return to shareholders in the form of share buybacks and dividends (which could only be announced from June 27).

Layoffs sweeping the tech sector have now spread to finance with JP Morgan Chase — the nation’s largest bank — moving to cut hundreds of home lending staff as rising mortgage rates and inflation cool demand in the housing market.

Elon Musk says Tesla’s factories are “gigantic money furnaces right now.” Musk said in an interview that plants in Texas and Berlin were “losing billions of dollars” as battery shortages and shipping issues slowed production. He said the company’s main concern was keeping factories operating, so it could keep paying people and “not go bankrupt.”

     Meanwhile, the Biden administration reached out to Tesla the morning that President Joe Biden took office to discuss how to incorporate electric vehicles (EVs) into the Renewable Fuel Standard (RFS), according to documents reviewed by Reuters. The topic was on the electric Renewable Identification Numbers (e-RINs), the credits generated with biofuel production and can be purchased by refiners to demonstrate compliance with the RFS. How EPA deals with EVs and the e-RINs relative to the RFS in 2023 and beyond will be key.

European Union leaders are expected to invite Ukraine and neighbor Moldova to begin the protracted process of entering the bloc. A formal move by European Union leaders to grant candidate status to Ukraine and Moldova  is expected.

The German government moved closer to rationing natural gas today after Russia cut deliveries to the country last week in an escalation of the economic war triggered by Moscow’s invasion of Ukraine. Kremlin-controlled energy giant Gazprom, the country’s biggest gas exporter, throttled delivery via the Nordstream pipeline by around 60% last week. European power prices surged to the highest level since December.

     Economy Minister Robert Habeck said gas had now become a scarce commodity and warned an extraordinary price rally could persist. “This will affect industrial production and become a major burden for many consumers. It’s an external shock,” Habeck said. "We will defend ourselves against this, but it will be a rocky road that we as a country now have to walk. Even if you don't really feel it yet, we are in a gas crisis."

     Bottom line: Policymakers in Europe are currently scrambling to fill underground storage with natural gas supplies to provide households with enough fuel to keep the lights on and homes warm before the cold returns. If Germany ups its gas plan to the third and last "emergency" level, the government would assume control over the entire nation's distribution network. Germany has already reopened several coal-fired power stations to shore up supply, which could dent European support for climate efforts or push Ukraine into an unfavorable settlement with Russia.

Biden may not get Congress to go along with suspending federal gas and diesel taxes for three months as economists and business leaders say that would do little to address record-high gas prices. A suspension of the 18.4-cents-a-gallon federal gasoline tax and 24.4-cents-a-gallon diesel tax through September would require congressional approval. Lawmakers of both parties have signaled resistance, with some Democrats expressing concern that a suspension of the tax would have a limited effect on prices and allow oil companies to pocket much of the savings. Sen. John Thune (R-S.D.) dubbed the proposal “dead on arrival.”

     Democrats are also negative toward the proposal — both in the past and now. In 2008, running against John McCain, Barack Obama dismissed it as a political “gimmick.” House Speaker Nancy Pelosi dismissed the idea this spring, and on Wednesday she refused to endorse it. She has claimed oil companies wouldn’t pass the relief to consumers, and Treasury Secretary Janet Yellen has echoed that view. Senate Energy and Natural Resources Chair Joe Manchin (D-W.Va.) noted the 90-day period for the gas tax holiday would run out just before election day. “Which politician up here is going to be voting to put that 18-cent tax back on a month before the November election?” he asked.

     Perspective: Based on $5/gallon gas, a gas tax holiday would mean savings of less than 4% per gallon. The driver of a typical full-size SUV would save only about $4.60 a week, according to calculations by GasBuddy. That's not even enough to buy an extra gallon. Plus, cheaper gas could increase demand and drive prices back up, warns GasBuddy analyst Patrick De Haan. As the Wall Street Journal points out: “The federal gas tax is levied when fuel leaves a refinery or is imported rather than at the point of sale. So a suspension would take time to filter to consumers and could be swamped by increases in the market price of crude. If crude prices climb to $140 a barrel in the coming months—and they could—drivers might not even notice the tax holiday.”

Annual inflation in Canada accelerated in May toward 8%, reaching a nearly four-decade high and all but assuring market expectations that the country’s central bank will raise its policy interest rate by three quarters of a percentage point in July. Economists expect inflation in Canada to surpass 8% when June data are released, and possibly stay above 7% for most of 2022.

What USTR Tai said, and signaled, during Wednesday hearing before a Senate Appropriations subcommittee:

• Punted China tariff issues to the White House, noting comments from President Joe Biden that he was still considering what to do with those tariffs. Asked if USTR was ceding trade policy to the White House, Tai said her remarks were meant to indicate “these issues are under consideration for decision as we speak right now.” But Tai herself does not want to get rid of the China tariffs. “The China tariffs are, in my view, a significant piece of leverage,” Tai stated. “And a trade negotiator never walks away from leverage.” Meanwhile, China’s commerce ministry said the sooner U.S. tariffs on Chinese goods are lifted, the sooner consumers and companies will benefit. It says removing all additional tariffs on Chinese goods would benefit China, the U.S. and the world. But Tai said lifting the tariffs would have limited impacts on controlling short-term inflation
• Acknowledged China has not lived up to terms of the Phase 1 accord. “That is what is leading us to conclude that it is time to turn the page on the old playbook,” she said, without revealing the new page.
• Said she would be open to negotiating another lumber agreement with Canada, but “that requires the Canadian government to be willing to address the fundamental challenges” which they have not been so far.
• Emphasized that the administration is focused on enforcement of trade agreements.
   

Farm policy update:

• As expected, the Senate Ag Committee on Wednesday approved two measures on livestock markets via voice vote: The Meat Packing Special Investigator Act (S 3870) and Cattle Price Discovery and Transparency Act (S 4030). The special investigator bill would set up a separate office at USDA to investigate competition issues in the U.S. livestock industry. Opponents argue it duplicates efforts already on the books at USDA via the P&SA Act and would increase costs and regulatory burdens on smaller producers. The cattle pricing bill would establish five marketing regions in the continental U.S. and require a specified percentage of cattle be traded via the cash market. The National Cattlemen’s Beef Association says that mandating sales activity could take away other pricing opportunities for producers. Despite Sen. Chuck Grassley (R-Iowa) saying the votes are there for full Senate approval, that outcome is far from assured.
• House to vote today on extension of school meal waivers. House Majority Leader Steny Hoyer (D-Md.) said the House will vote today on the Keep Kids Fed Act, which would extend school meal waivers with some changes for summer meals beginning July 1 and the next school year. It is expected to easily pass.
• During a House Ag panel hearing on dairy, the National Milk Producers Federation said the dairy industry is seeking consensus on a range of Federal Milk Marketing Order improvements, including the Class I mover, that can be taken to USDA for consideration in a federal order hearing. Mike Durkin, president of Leprino Food Company, testified on behalf of the International Dairy Foods Association, a processor group, that IDFA recommends that:
  • Congress require USDA to conduct regular cost of processing studies that will generate data for our industry to use to develop proposals to adjust make allowances. Current make allowances have not been adjusted in over 15 years, and as a result, they don’t reflect the cost of manufacturing today’s dairy products.
  • The House Agriculture Committee reauthorize and expand the Healthy Fluid Milk Incentives Projects in the Supplemental Nutrition Assistance Program (SNAP).
  • Congress pass permanent authorization of the Dairy Forward Pricing Program, which allows producers to enter into forward price contracts with milk buyers for milk used to manufacture Class II, III, or IV products. Current authority for this program expires on September 30, 2023, which means that no forward price contracts may be entered into after that date.
     

Support for a bipartisan gun reform measure in the Senate reflects a political shift. Fourteen Republicans — including Mitch McConnell of Kentucky, the minority leader — broke with their party to advance the legislation. Only two are up for re-election this year, and most Republicans are expected to oppose the bill.

21.3 million is the IRS backlog of unprocessed paper tax returns at the end of May. That’s up 1.3 million from a year earlier, according to Erin Collins, the national taxpayer advocate. Agency officials have said they aimed to return the backlog to a “healthy” level in the next six months.