Senate Taking Steps to Clear CR by Thursday; House Vote Expected Friday

China’s economic data disappoint; population declines | Tax package hurdles | White House confab today

Modified report today as I am en route to Effingham, Illinois,
 to speak at an Farm Credit Illinois meeting.

— Equities, today: Shares slumped across Asia after Chinese data redoubled concerns about China’s economy. The Hang Seng headed for its worst loss since October 2022. The Hong Kong market has lost more than 10% since the beginning of the year. Meanwhile, the Bank of Japan is expected to hold its negative interest rate next week in the wake of the New Year Day's earthquake, a Bloomberg poll (link) shows. European equities were lower as markets continued to second-guess previous bets of imminent rate cuts by the ECB and other key central banks. The ECB may cut rates in the summer, ECB President Christine Lagarde said. She added that policy makers are “on the right path” in their fight to tame consumer prices, and that it’s their role to say what may happen. Link for more via an interview with Bloomberg. Annual inflation rate in the UK unexpectedly rose to 4% in December 2023 from a nearly two-year low of 3.9% in November, and above forecasts of 3.8%. It is the first increase in inflation rate in ten months, with the biggest upward contribution coming from prices of alcohol and tobacco

     U.S. equites, yesterday: All three major U.S. indices opened the week with losses. The Dow was down 231.86 points, 0.62%, at 37,361.12. The Nasdaq fell 28.41 points, 0.19%, at 14,944.35. The S&P 500 lost 17.85 points, 0.37%, at 4,765.98.

— Brent crude futures dropped below $78 per barrel on Wednesday. This decline was primarily due to the strength of the U.S. dollar, which became stronger as traders reduced their expectations of a rate cut by the Federal Reserve in March. Federal Reserve Governor Christopher Waller suggested that the central bank might not cut interest rates as aggressively as the market had anticipated (see related item). A stronger U.S. dollar makes oil priced in dollars more expensive for buyers who use other currencies, which can reduce demand for oil. Despite the stronger dollar, tensions in the Middle East acted as a supporting factor for oil prices. Houthi militants in the region continued to disrupt Red Sea shipping, causing many oil tankers to avoid the area and take longer routes around southern Africa. These diversions result in longer shipping times, with journeys taking an additional 14 days. The market is now awaiting OPEC's monthly report for more insights into the outlook of oil prices.

— The EU will finish the winter with gas facilities at 54%, underscoring the bloc’s energy resilience despite a sharp drop in Russian supplies. A return to normal demand “still can’t be afforded in the medium term” while risks remain, especially related to supply disruptions caused by Middle East conflicts, according to presentation slides (link) prepared by the commission seen by Bloomberg.

— Ag markets yesterday:

     Corn: March corn futures fell 3 1/2 cents to $4.43 1/2 and near the session low.

     Soybeans: March soybeans rose 3 cents to $12.27 1/4, a near mid-range close, while March soymeal rallied $6.40 to $367.40. March soyoil fell 96 points to 47.68 cents.

     Wheat: March SRW wheat closed down 14 cents at $5.82. March HRW wheat closed down 13 3/4 cents at $6.01 1/2. Both markets closed near their session lows and hit six-week lows today. March spring wheat fell 8 3/4 cents to $6.90 3/4. A strong rally in the U.S. dollar index to a four-week high and risk aversion in the general marketplace due to heightened Middle East tensions sunk the wheat futures markets today.

     Cotton: March cotton rose 2 points to 81.33 cents, a high-range close.

     Cattle: February live cattle futures surged $1.75 before settling at $173.125. March feeder cattle futures rallied $1.125 cents to $228.825, while nearby January futures closed 97.5 cents higher at $227.55.

     Hogs: Hog futures declined Tuesday with nearby February leading the way lower. A late rebound cut the loss to $1.125, with the close coming in at $70.775.

— Fed’s Waller urges caution when time comes to lower rates. Central bankers need to watch their step when it comes time to consider lowering rates, Federal Reserve Governor Christopher Waller said. “Methodically and carefully” is the way to go, Waller added. “As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year,” Waller said at a virtual event hosted by the Brookings Institution on Tuesday. “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he noted. “With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past,” he said, pointing to previous economic shocks that have precipitated rapid rate cuts. Traders pared back the probability of a rate cut as soon as March as well as the degree of total policy rate declines seen for the full year.

     Bottom line: Waller described current financial conditions as restrictive and said “the setting of policy needs to proceed with more caution to avoid over-tightening… I believe policy is set properly,” he said. “It is restrictive and should continue to put downward pressure on demand to allow us to continue to see moderate inflation readings.”

— Senate sets new funding deadlines, aims to avoid partial shutdown. Senate leadership is moving to establish two new funding deadlines on March 1 and March 8, with the goal of avoiding a partial gov’t shutdown, and giving appropriators still more time to write fiscal year (FY) 2024 funding bills that adhere to the topline agreement reached by Senate Majority Leader Chuck Schumer (D-N.Y.) and House and Speaker Mike Johnson. (R-La.). Despite weather-related issues in the nation's capital, the schedule remains on track. The Senate on Tuesday evening voted 68 to 13 to invoke cloture on the motion to proceed to the legislative vehicle for the latest continuing resolution (CR). The Senate today will resume consideration of the measure. Senators need to agree on the timing for passing the measure before the Saturday deadline and this requires unanimous consent.

     The House aims to take up the stopgap bill by Friday, potentially bypassing procedural votes but requiring two-thirds support (290 votes) for passage, very likely with big assistance from Democrats.

     If these steps proceed smoothly, the Senate could clear the stopgap by Thursday, followed by House passage on Friday, thus avoiding a partial shutdown. However, any delays or uncertainties in Senate passage or House support could lead to a brief shutdown affecting various agencies, including USDA.

— Congressional leaders to meet Biden on national security supplemental and Ukraine aid. Congressional leaders, including Speaker Mike Johnson (R-La.), Senate Majority Leader Chuck Schumer (D-N.Y.), Senate Minority Leader Mitch McConnell (R-Ky.), and House Minority Leader Hakeem Jeffries (D-N.Y.), are set to meet with President Joe Biden at the White House today. The meeting will focus on the national-security supplemental, which has faced lengthy delays.

     During the meeting, the White House is expected to present its case for providing aid to Ukraine, as Congress has not approved new Ukraine funding since December 2022. Republicans have blocked aid to Ukraine, Israel, and Taiwan to secure a larger border-and-immigration bill and in the case of Ukraine, to receive more transparency from the Biden administration on the use of prior aid to Ukraine. Republicans are insisting on stronger border security provisions before signing off on any additional aid.

     Bottom line: It just may be an all-talk, no-action meeting. Reason: McConnell has encouraged Republican senators to unite and back a border deal that Sen. James Lankford (R-Okla.) is working on with Democrats. McConnell believes that this is an opportune moment to embrace such a deal, as Democrats are open to imposing substantial border restrictions in return for foreign aid. McConnell stressed that securing a border deal under a potential future Donald Trump presidency would be unattainable. As for the House, Johnson’s position is that whatever Congress passes should be like HR 2, the border bill House Republicans passed last May that will not attract any Democratic Senate votes and is opposed by the White House. As for a new Congress post-election, under a GOP majority and a Republican president, there would not be enough Democrats signing on to give Republicans the necessary 60 votes for a border package. Similar efforts failed under Trump the last time for that and other reasons.

— Qatar said it mediated a deal between Israel and Gaza-based militant group Hamas to allow Israeli hostages to get medicine in exchange for more humanitarian aid being allowed into Gaza — marking the first successful negotiations around hostages in months. France also assisted in the mediations.

— Biden administration to redesignate Houthi rebels as global terrorists amid Red Sea attacks. The Biden administration is reportedly set to announce the redesignation of Iranian-backed Houthi rebels in Yemen as specially designated global terrorists, the Associated Press reports (link). This decision comes in the wake of multiple attacks by the Houthis on commercial vessels in the Red Sea. The group has claimed these attacks as a response to Israel's military actions in Gaza following an attack by Hamas on Oct. 7. The announcement is expected to be made today.

— The U.S. hit four Houthi missiles in Yemen in a pre-emptive strike on Tuesday, American defense officials said. “U.S. forces struck and destroyed four Houthi anti-ship ballistic missiles,” Central Command said in a statement. “These missiles were prepared to launch from Houthi-controlled areas of Yemen and presented an imminent threat to both merchant and U.S. Navy ships in the region.”

     Houthi leaders say they will continue their attacks, vowing solidarity with Palestinians in Gaza.

— Some insurers are starting to avoid covering UK and U.S. ships in the Red Sea, according to Marsh (link). Japan’s three largest shipping firms became the latest to halt transits through the area.

— China Q4 GDP growth below estimates. The Chinese economy expanded 5.2% year over year in Q4 of 2023, faster than a 4.9% growth in Q3 but less than market forecasts of 5.3%. Activity data for December showed that industrial production rose the most in almost two years, but retail sales increased the least in three months and the surveyed jobless rate edged up to a four-month high. For the full year, the economy also grew by 5.2%, exceeding the official target of around 5.0% and picking up from a 3.0% rise in 2022 amid various support measures from Beijing and a low base comparison from the prior year. Barring the pandemic years through 2022, the 2023 GDP growth is the slowest pace of annual rise since the Tiananmen Square massacre in 1989, underscoring the impact of a prolonged property crisis, persistently weak consumption, and global turmoil.

      Premier Li flagged the annual result in his speech at the World Economic Forum's Davos conference on Tuesday, as he sought to ease investor concerns about China after an uneven year characterized by instability in the property sector.

     Reaction: Tianchen Xu, senior economist for China at the Economist Intelligence Unit, said in a note that the country's economic performance in 2023 warranted a grade of "pass." "While the economy did beat the official target, it could have scored a higher grade through a more forceful response to the property meltdown and greater commitment to the private sector."

     Of note: China resumed releasing the youth unemployment rate, saying it improved to 14.9% in December after spending months tweaking the methodology on the figure that hit a record 21.3% last summer. Also, China home prices fell the most in almost nine years in December. New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.45% from November.

     For 2024, Beijing is set to announce the GDP growth target at an annual parliamentary meeting in early March.

     The World Bank, in its latest assessment of the global economy on Jan. 9, forecast China's growth will slow to 4.5% in 2024 on the back of weaker domestic demand and mounting geopolitical tensions. Such a slowdown would cast a shadow over economic growth in the East Asia and Pacific region, which is predicted to slow to 4.5% this year, from 5.1% in 2023.

— Chinese population shrinks again as births fall to record low. China's population fell for a second consecutive year in 2023, as a record low birth rate and a wave of Covid-19 deaths when strict lockdowns ended accelerated a downturn that will have major long-term effects on the economy's growth potential. The National Bureau of Statistics said the total number of people in China dropped by 2.08 million, or 0.15%, to 1.409 billion in 2023. That was well above the population decline of 850,000 in 2022, which had been the first since 1961 during the Great Famine of the Mao Zedong era. Total deaths last year rose 6.6% to 11.1 million, with the death rate reaching the highest level since 1974 during the Cultural Revolution. New births fell 5.7% to 9.02 million and the birth rate was a record low 6.39 births per 1,000 people, down from a rate of 6.77 births in 2022.

— Tax package faces uncertain future amid lack of support and political hurdles. A tax deal around $80 billion announced by Sen. Ron Wyden (D-Ore.) and Rep. Jason Smith (R-Mo.), who lead Congress' tax-writing committees, is facing some key hurdles. The deal includes breaks for research and development, business interest, equipment depreciation, and changes in the child tax credit aimed at benefiting the working poor. It also includes disaster aid for impacted producers.

     The tax deal is still facing significant obstacles and does not have enough support to move forward, sources advise. It needs to merge with legislation to avert a partial federal shutdown, which adds complexity and uncertainty to its passage.

     The deal lacks sufficient support even within the committees led by Wyden and Smith.

     Of note, key political figures, including Speaker Mike Johnson (R-La.) and Senate Majority Leader Chuck Schumer (D-N.Y.), have not yet commented on the deal, and President Joe Biden has not endorsed it.

     The package may require strong Democratic support in the House due to the narrow House GOP majority, making it vulnerable to opposition from a small number of Republicans.

     While Senate negotiators have been working on a border package with the White House, Speaker Johnson does not favor language in the Senate bill. But McConnell has been urging Republicans to accept the deal expected to be finalized in the coming days, as President Biden appears to be taking the border situation seriously after a lengthy time of inaction on Republican requests.

     Key holdout: Sen. Mike Crapo (R-Idaho), the top Republican on the Senate Finance Committee, wants some changes. After briefing panel members Tuesday night that he backs reviving business tax benefits and is open to “an appropriate child tax credit set of provisions,” Crapo said he has issues with the current package, but no specifics are available.

— The tax package includes the following provisions (Source: Farm CPA Report (link/paywall):

• Postponing the requirement to amortize research and experimentation expenses until taxable years beginning after Dec. 31, 2025, potentially requiring amended tax returns for those who already amortized these expenses in their 2022 returns.
• Allowing taxpayers to include depreciation and amortization in adjusted taxable income for calculating business interest expense retroactively to the 2022 tax year.
• Extending 100% bonus depreciation through Dec. 31, 2025, with a gradual reduction to 20% for assets placed in service in 2026 and zero thereafter.
• Minor increases to Section 179 for 2024, allowing farmers and other taxpayers to expense up to $1.29 million and increasing the phase-out threshold.
• Modifications to the refundable child tax credit, increasing it to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025. It will also be adjusted for inflation starting in 2024.
• Allowing taxpayers to use previous year income to calculate earned income for 2024 and 2025.
• The child tax credit is set to revert to $1,000 in 2026, and a tax exemption will be allowed, potentially reducing the credit for those who do not pay taxes.
• The tax package extends disaster-related personal casualty loss changes, removing the rule that losses must exceed 10% of AGI and $500 to be allowed.
• Compensation related to losses or damages resulting from certain wildfires would be excluded from gross income, applying to losses incurred between Jan. 1, 2020, and Dec. 31, 2025.
• Form 1099-MISC and 1099-NEC thresholds would be increased to $1,000 for payments made in 2024, adjusted for inflation thereafter.
• The penalties for promoters of Employee Retention Credit (ERC) would be increased from $1,000 to the greater of $200,000 or 75% of the gross income of the promoter. Promoters meeting specific criteria would need to provide information to the IRS.
• The statute of limitations for ERC credit claims would be extended to six years, allowing taxpayers to claim a wage deduction for invalid ERC claims.
• The provision bars any ERC claims after Jan. 31, 2024.

— In the age of Ozempic, the food industry is moving away from its tactic of marketing products as impossible to resist. Link to details via the New York Times.

— The U.S. won’t quit NATO regardless of the outcome of this year’s elections and despite threats by GOP presidential nominee Donald Trump to exit the military alliance, Secretary General Jens Stoltenberg told Bloomberg TV in Davos. “The U.S. will remain a staunch and important ally because it’s in the security interest of the United States to have more than 30 friends and allies,” he said at the World Economic Forum.

— Canadian Prime Minister Justin Trudeau said if Trump wins a second term, it would require Canada to adjust its approach to relations with its No. 1 trading partner. Trudeau, whose center-left Liberals came to power in November 2015, had rocky relations with Trump during his first four-year White House term. In 2018, Trump accused Trudeau of being weak and dishonest. "It wasn't easy the first time and if there is a second time, it won't be easy either," Trudeau said in French during a discussion hosted by the Montreal Chamber of Commerce. He added: "But we can't imagine a day when it will ever be easy with the Americans. The main responsibility for any prime minister is to represent and defend Canada's interests… we've been able to do this very well these past few years."

     Of note: The U.S.-Mexico-Canada Agreement (USMCA) requires a “joint review” of the Agreement six years after entry-into-force — the accord entered into force on July 1, 2020. At the joint review, the parties will review the operation of the agreement, review any recommendations for action submitted by a party, and decide on any appropriate actions. The agreement can be extended for additional 16-year terms during the six-year reviews.

— Four in 10 Iowa Republican voters ranked immigration as the most important issue facing the country, while a third picked the economy as their top concern, AP VoteCast found.

— New Hampshire debate scrapped after Nikki Haley says she won't debate Ron DeSantis without Trump. Former South Carolina Gov. Nikki Haley announced Tuesday she would only appear onstage with GOP frontrunner Donald Trump or President Biden — not solely with Florida Gov. Ron DeSantis.

— Link to interview with Canada’s Shaun Haney of realagriculture.com: Wiesemeyer and Haney: Deficit hawks could spell trouble for farm programs. Topics:

• Monday night, at the Iowa Caucuses, former president Donald Trump took a break from all his court appearances to lay the smackdown on Nikki Haley and Ron DeSantis in a very strong showing, winning 51% of voter support. What does this mean for New Hampshire next week or even the probability that President Biden is not the Democratic candidate?
• Why does the U.S. election process have to be the drawn out process which is so unique in comparison to the rest of the G7?
• With growing populism and protectionism in parts of the world, improving on market access is challenging.
• In both Canada and the U.S., there is a growing focus on dealing with debt and deficits but what could that mean for farm support programs and legislation like SCAP (Canada) or the farm bill (U.S.)?
   

— NWS weather: Heavy mountain snows for the Northwest/Rockies; ice storm for portions of the Pacific Northwest... ...Bands of heavy lake-effect snow continue for the Great Lakes... ...A return to more typical Winter temperatures for many Wednesday after the brutal cold; another Arctic blast expected late this week.

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