China may want to renegotiate Phase 1, but Trump says 'not even a little bit' interested
In Today’s Updates
* Australia/China trade war begins despite denials of tiff reason re: coronavirus
* USTR Lighthizer argues 'the era of reflexive offshoring is over'
* NCC takes on KSU paper saying U.S. cotton producers were overpaid re: MFP
* Fed begins buying ETFs
* Saudis deepen oil production cut
* Oil prices rise
* Chesapeake Energy warned that it might not be able to stay in business
* Public pensions lost a median 13.2% in the first three months of 2020
* Trump 'not even a little bit' interested in renegotiating Phase 1 deal w/China
* USDA today issues latest WASDE
* It's not what's in Democratic shopping list for next aid package, but what is left out
* U.S. food supply update
* Chinese buyers willing to pay more for meat than U.S. consumers and other nations
* Update on reopening America... and around the world
* Coronavirus update
* DOC publishes notices on Argentina biodiesel
* Joe Biden and President Trump each raised about $60 million in April
* Largest solar project in the United States gets approval
* House Dems upset over failure to establish labor enforcement task force re: USMCA
* New aluminum industry study faults increased imports from Canada
Equities today: Global stock markets were narrowly mixed. U.S. futures are signaling a higher open amid optimism about an economic recovery, but there are fears about a second wave of coronavirus infections — Dr. Fauci will testify before the Senate this morning and liberal-leaning newspapers are noting what he will say.
U.S. equities yesterday: The Dow fell 109.33 points, 0.45%, at 24,221.99. The Nasdaq gained 71.02 points, 0.78%, at 9,192.34. The S&P 500 edged up 0.52 point, 0.02%, at 2,930.32.
Commodity markets: Speculative net short positioning in corn futures is at an extreme, while Bloomberg's grains index is hovering near multi-decade lows.
U.S. daily export sale. Private exporters reported to USDA export sales of 136,000 metric tons of soybeans for delivery to China during the 2019-2020 marketing year.
Crude oil prices are posting gains, with U.S. futures up nearly 5%, trading around $25.30 per barrel while Brent crude is up more than 2%, trading around $30.30 per barrel.
Chesapeake Energy warned that it might not be able to stay in business, as weak oil and natural-gas prices imperil a yearslong effort to pay down hefty debt. Chesapeake now is among dozens of U.S. shale firms facing possible bankruptcy a crude prices crash. Analytics firm Rystad Energy expects some 140 American oil and gas companies to file for bankruptcy protection this year at a U.S. benchmark oil price of around $20.
The oil collapse has pushed the price of diesel across the country below $2.40 for the first time since October 2016, while world-wide prices for maritime low-sulfur fuel have fallen by more than half since February.
What Shape for a Recovery? As China's data is showing, the world can probably forget about a V-shaped recovery: a short, sharp collapse followed by a bounce back to pre-virus levels of activity. Policy makers and corporate executives now expect a “swoosh." Named after the Nike logo, the forecast predicts a large drop followed by a painfully slow recovery, with many Western economies not back to 2019 levels of output until late next year — or beyond, according to a Wall Street Journal article (link).
Americans’ outlook for the job market and their personal finances deteriorated in April. The Federal Reserve Bank of New York's monthly survey of consumer expectations found that respondents’ median expectation of losing their job over the next year rose to a series high, while expected earnings, income and spending growth each reached series lows.
Outlook among small businesses has cratered. The National Federation of Independent Business small business optimism index posted its largest two-month fall on record as of last month. Sales expectations dropped to the lowest reading in the survey’s 46-year history. The one positive: The share of owners expecting the economy to improve over the next six months rose to 29%, hardly a majority but still a big improvement from the prior month's minus-17%.
Public pension plans lost a median 13.2% in the three months ended March 31, according to Wilshire Trust Universe Comparison Service data released Tuesday, slightly more than in the fourth quarter of 2008. “There will be a lot of pressure to cut benefits,” said Don Boyd, co-director of the State and Local Government Finance Project at the University at Albany.
The U.S. Federal Reserve pushed back against market expectations that rates will go negative, with some officials expecting the central bank will have to do more before this crisis is over.
Meanwhile, the Fed today will buy corporate bonds for the first time in its history. Its corporate bond-buying program was announced in March, as part of a package of pandemic rescue measures. The Fed will start with bond ETFs. Most purchases will be in funds that hold investment-grade debt, the central bank said, but it will dabble in junk bonds. Direct purchases of corporate debt will follow. The program, managed by BlackRock, will take $75 billion in equity from the Treasury and leverage it 10-to-1, giving it up to $750 billion to play with.
Another Fed facility designed to buy debt directly from issuers, the Primary Market Corporate Credit Facility, is set to launch "in the near future."
Sub-zero in the U.K. Britain could be headed toward negative interest rates at upcoming Bank of England monetary policy meetings, declared Deputy Governor for Monetary Policy Ben Broadbent. "The committee are certainly prepared to do what is necessary to meet our remit with risks still to the downside," he told CNBC. Besides two previous rate cuts, the BOE has announced fresh quantitative easing.
Saudis deepen oil production cut. Saudi Arabia announced Monday it is voluntarily cutting another 1 million barrels per day of oil production in June, on top of the output curbs it is leading as part of the OPEC+ agreement. If Saudi Arabia fulfills its pledge to pump just under 7.5 million barrels a day in June, it would be its lowest oil production level since 2002, according to data compiled by Bloomberg. The announcement comes after President Trump spoke with Saudi King Salman on Friday, when the two leaders “agreed on the importance of stability in global energy markets,” according to a White House readout.
Other Gulf countries Kuwait and United Arab Emirates also announced smaller additional production cuts beyond their targets in the OPEC+ agreement, which called for a collective reduction of nearly 10 million barrels per day. UAE is reducing its output an additional 100,000 barrels per day for June. Kuwait is cutting an extra 80,000 barrels per day.
Meanwhile, in Saudi Arabia, oil giant Aramco said that its first-quarter profit fell by a quarter and that it would cut spending this year, underscoring the effects of lower oil prices and the coronavirus pandemic on the kingdom’s worsening finances.
Supreme Court hearing today on whether investigators can obtain President Trump’s financial records. Lower courts in Washington and New York upheld the subpoenas over Trump’s objections that the president’s constitutional status insulates him from congressional oversight powers and state criminal investigations.
— USDA today releases its WASDE report which will include:
• Projections of 2020-21 balance sheets for U.S. and world
• First survey-based estimates for U.S. winter wheat
• World crop projections
Comments: Market chatter after the report will likely follow years of usually wrong private industry analysts' commentary such as yield estimates by USDA are too high; ditto for carryover forecasts, etc. The weather ahead will have more importance than today's report, so don't spend too much time on it. Some focus should be on what if anything USDA says about the U.S./China Phase 1 agreement.
— China halts Australian beef imports from four firms. Alleged Issues with health certificates were officially cited by China as it has barred beef imports from four Australian companies —Kilcoy Pastoral Company, JBS's Beef City and Dinmore plants, and the Northern Cooperative Meat Company. (The Beef City and Dinmore plants are both owned by JBS Australia.)
China has “notified the relevant Australian departments and required them to investigate completely the reason for the problem and to fix it," Chinese Foreign Ministry spokesman Zhao Lijian said in a briefing. China has “continuously” found issues with compliance on inspection and quarantine requirements, Zhao said, but noted the situation is not linked to the tensions between the two countries over the Covid-19 pandemic.
Australian Trade Minister Simon Birmingham called the suspension "disappointing,” but also denied it was linked to the Covid-19 situation. However, Asian trade expert Dr. Jeffrey Wilson says Chinese sanctions on Australian barley and beef are retaliation against Scott Morrison’s push for coronavirus inquiry, declaring the two countries are now “in a trade war.” Dr. Wilson, the research director at the Perth USAsia Center, said the suspension of imports from four Queensland meat facilities for purported sanitary issues would disrupt about a third of Australia’s $3 billion annual beef exports to China. “This is unquestionably political retribution,” Dr. Wilson said, noting China’s ambassador to Australia, Cheng Jingye, had recently threatened Chinese consumer boycotts of Australian beef. “This is not about technical issues and arguments over trade policy. This is about diplomatic signaling and making a point. Australia now finds itself in a trade war.”
Australia has angered China by calling for an inquiry into the origins of the Covid-19 virus.
The situation with Australian beef arrives as the U.S. has seen China purchase U.S. beef under terms of trade worked out in the Phase 1 trade agreement.
Regarding Australian barley, China has set May 19 as the deadline to make a decision on proposed antidumping tariffs of up to 73.6% and a subsidy margin of another 6.9% on Australian barley. Analysts have suggested the U.S. could capture some of China’s barley market, but a report from the U.S. ag attaché in Beijing does not list the U.S. as having a bilateral phytosanitary protocol with China – only those with such protocols are allowed to export grains to China.
What's next? Dr. Wilson, according to The Australian newspaper, said he expected further trade sanctions in the future as China pressed its political point against Australia, which has led the global call for an independent investigation into the coronavirus pandemic. “Traditionally you would’ve expected sanctions on tourists and students, because that is something the Chinese government can manage through exit visas. But with the coronavirus, there are no tourists or students. “So we are seeing agricultural sectors being hit... It probably won’t be iron or coal, because those things are critically important for China’s recovery. With beef and barley, there are alternate suppliers, particularly in Canada” he said. “This is something the Chinese can sanction where the pain is on our side, not theirs. Whereas iron ore, coal and natural gas — that’s mutually assured destruction.”
Dr. Wilson said China was misguided if it expected the Australian government to shift its position. The Australian government should not and I expect will not change its position as a result of this kind of stuff,” he said. “They are basically bashing the s*** out of Australian farmers - in both cases badly drought-affected for the last few years... If this is an attempt to kind of sway some parts of the Australian community against the government’s position, I suggest it will backfire terribly.” He said the sectors were unfortunate victims of the government’s position and “I’d certainly encourage governments to find ways to give these guys a hand for taking a hit for the country as a whole.”
— USTR Lighthizer declares offshoring of U.S. manufacturing jobs is ‘over.’ The trend of offshoring U.S. manufacturing jobs turned into a “craze,” but now the that situation has come to an end, U.S. Trade Representative Bob Lighthizer said in an op-ed item in the New York Times (link).
“Cheap labor meant higher profits,” Lighthizer said, but also meant the U.S. lost five million manufacturing jobs. Trade policies in the 1990s and 2000s “magnified the disaster” by making it easier to offshore jobs, with the action to give China permanent most-favored nation (MFN) trading status in 2001 a major contributor.
He also said trade deals like NAFTA exacerbated the situation and gave companies what he called “regulatory arbitrage: Companies could avoid U.S. labor and environment standards by manufacturing abroad while still enjoying unfettered, duty-free access to our market.”
The use of the investor-state dispute-settlement provisions effectively meant the U.S. government “purchased political risk insurance for any American company that wanted to send jobs abroad.” But the Covid-19 situation has revealed these strategies have put U.S. businesses at risk as it has exposed issues in the supply chain. Policies pursued by the Trump administration are also trying to reverse the trend, telling businesses that if they thought the policy shift created “uncertainty,” all they had to do was bring plants and jobs back to the United States. The Covid-19 situation has “revealed our over-reliance on other countries as sources of critical medicines, medical devices and personal protective equipment.”
Lighthizer declared the “era of reflexive offshoring is over” and called for businesses not to forget the lessons revealed during the Covid-19 pandemic, concluding by simply saying, “Bring the jobs back to America.”
— Cotton Council takes on KSU study on trade mitigation payments (MFP). The National Cotton Council (NCC) issued a paper (link) disputing the conclusion of a Kansas State University study detailed in this space last week that said the U.S. cotton industry was overcompensated in the Trump administration’s Market Facilitation Program (MFP). The paper said that “a further look at actual price and trade data confirms that cotton producers have not been overcompensated for the trade damages.”
NCC said the MFP aid “has only partially compensated cotton producers for the loss in market revenue.” NCC's analysis noted:
▪ “USDA’s methodology of determining trade damage was consistent across all commodities.
▪ “The author’s implication of overcompensation was based on a comparison of USDA’s model with other modeling approaches. In the case of cotton, the other studies acknowledged that their results were preliminary in nature and did not have the benefit of actual trade data.
▪ “Cotton producers did not receive USDA’s estimated trade damage of 26 cents on all bales produced. USDA’s county-level methodology produced a weighted average payment of $99 across all 2019 cotton acres. With a yield of 805 pounds per acre, the average per‐pound compensation for cotton was 12 cents, not 26 cents.
▪ “Between June 2018 and January 2020, the market value of an average acre of cotton fell by $197. MFP assistance compensated just 50% of that decline.”
— Update on U.S./China policy:
- China sets new tariff waivers on some U.S. goods. China has released a new list of 79 U.S. products that will be eligible for waivers of retaliatory tariffs, effective May 19 and the waiver would expire May 18, 2021, according to the Customs Tariff Commission of the State Council. The Commerce Ministry said the products included ores of rare earth metals, gold ores, silver ores and concentrates.
This is the second round of U.S. products where a one-year waiver on retaliatory tariffs has been put in place.
As for other products not covered by either list, the Xinhua News Agency said, “For U.S. products that are not on the first two lists, the commission advised enterprises to apply for the exemption of additional tariffs following a specific product list that applies to domestic firms which plan to sign deals to purchase and import these products from the United States in a market-oriented and commercial fashion.”
- Trump dismisses talk of renegotiating Phase 1 agreement with China. A report in the Global Times suggested that China may want to terminate the Phase 1 agreement with the U.S. and renegotiate the deal to be more beneficial to China. Asked at a White House briefing about the possibility, President Donald Trump said he had “heard that too” relative to the Global Times report. “They would like to reopen a trade talk to make it a better deal for them,” he said at a White House press conference. “I'm not interested in that. Let's see if they live up to the deal they signed.” From the Chinese side, Foreign Ministry spokesman Zhao Lijian said the Phase 1 deal is a positive. "China and America reaching the Phase 1 trade deal benefits China, benefits the U.S. and the whole world," Zhao said at a briefing.
— Update on likely next aid package — Phase 4/CARES 2:
- House vote on next stimulus package murky; Friday at earliest. The fourth Covid-19 aid plan (CARES 2) being developed by House Democrats is now expected to see a vote on Friday at the earliest as House Democrats have struggled to put the plan together. House Democrats discussed the plan with House Majority Leader Steny Hoyer (D-Md.) who said there would be 72 hours’ notice relative to when lawmakers would need to be in Washington for a vote.
Democrats are wrestling with details of the package, with some moderate Democrats concerned the party could be overreaching with the package if it goes beyond relief directly related to the pandemic. Some reports signal the price tag could be over $2 trillion.
There have been no discussions with Republicans at this stage. Senate Majority Leader Mitch McConnell (R-Ky.) continues to insist that time needs to be taken at this stage to assess the more-than-$2 trillion in aid already put in place. “We are basically assessing what we have already done,” he said.
- Farm-state Democrats' gimme list for Phase 4/CARES 2. The list includes:
• Push-the-envelope funding for SNAP/food stamps;
• A big boost in CCC borrowing authority, with stipulations on its use;
• $250 billion for Covid-19 testing, and prioritize workers in food processing and agriculture, and first responders and health-care providers “and the seniors and communities of color that are so disproportionately impacted by this disease.” (Note: The Trump administration plans to send $11 billion to states, territories and tribes to help expand testing.)
- Ag's gimme list grows from farm and biofuel groups, other lawmakers. It includes:
• The cost of euthanizing pigs that can’t be sent to slaughter because of the slowdown in processing plants (see related item below).
• Direct financial assistance for the ethanol and biodiesel industries (link to letter).
- Grassley, others call on Congress to provide pork producers with indemnity funds. Congress needs to consider funding efforts at USDA to help hog producers forced to depopulate herds due to the Covid-19 impacts on pork processing facilities, Sen. Chuck Grassley (R-Iowa) and 11 Senate colleagues said in a letter (link) to House and Senate leaders. “The downstream impact of idled plants is full farms, creating an animal welfare crisis due to overcrowding and the challenge of providing enough feed and water available to each animal,” the letter said. Idling of processing plants means there is an “immediate need to establish processes whereby some portion of the herd is humanely euthanized to prevent animal suffering. Failure to have a sensible and orderly process for thinning the herd will lead to animal health issues, environmental issues, and pork producers going out of business.” This means pork producers “need assistance now,” the letter said, noting that if 20% of U.S. pork processing capacity is idled, that means some 400,000 hogs per week have to be disposed of in some manner. “Accordingly, government support is needed in the management of a sensible depopulation of the herd until plant operations stabilize,” the letter said. “We must prioritize funding to indemnify producers who are depopulating herds due to processing plant closures.” The lawmakers added that authority for such programs at USDA “should be authorized as quickly as possible.”
- Mnuchin: Trump wants to wait “a few weeks” before considering additional new spending. In a telephone interview with CNBC’s Squawk On The Street Monday morning, Treasury Secretary Mnuchin said, “Congress worked very, very quickly with the Administration and the President on an unprecedented $3 trillion package, and we’re just getting that money now into the economy. So we’re having the second round of the PPP being dispersed. We have over 140 [million] Americans who got direct payments, either direct deposit or checks. ... And now what the President has said, is: let’s step back for a few weeks, let’s be very considerate in what we do in the next round before we go consider spending another trillion dollars or more of taxpayer money. But the President is determined we’ll do whatever we need to do.”
Mnuchin said he was not worried about spending $3 trillion on coronavirus relief efforts because of low U.S. interest rates.
— U.S. food supply/industry update:
- UFCW detailed at least 30 meatpacking workers have died of Covid-19 so far and at least 30 plants have closed in the past two months.
- Food distribution is taking new forms under the coronavirus pandemic. A new operation in New York City called DeliveryTLC s giving out-of-work taxi and ride-hailing drivers business by having them ferry boxes of food to the elderly, homebound and other people in need during the coronavirus pandemic. The Wall Street Journal reports (link) the effort works out of 10 distribution centers around the city, where groceries delivered on pallets are broken down into separate boxes. “It’s one of many new distribution operations that have been created as lockdowns have upended Americans’ dining habits and added strains to food pantries looking to feed the millions of suddenly unemployed,” the article noted. Food distributor Sysco Inc. has started offering online ordering for consumers with curbside pickup at “pop-up” locations around the country. The company normally supplies restaurants and other industrial-scale customers but has seen that business dry up under shelter orders.
- Exporters have been shipping more meat abroad despite fear of meat shortages at U.S. grocery stores. China ramped up its purchases of American meat as the African swine fever has decimated its own hog herds, with Chinese buyers willing to pay more than consumers in the U.S. and other nations, Reuters reports (link).
- In the week after President Donald Trump ordered meat processing companies to keep operating, the coronavirus spread twice as fast in counties home to a meatpacking plant. Confirmed cases rose 40% in counties with major beef or pork slaughterhouses, compared with 19% nationally, based on data compiled by Johns Hopkins University. Link to Bloomberg article for details.
— Update on reopening America... and around the world:
- Dr. Anthony Fauci, the nation’s top infectious disease expert, today plans to warn the Senate of “needless suffering and death” if the economy reopens too quickly. This is front-page news in major Democrat-tiling newspapers like the New York Times (link).
- New clusters of coronavirus infections are cropping up in South Korea, China and other countries that have loosened lockdowns.
- President Donald Trump complained that Democrats were loosening restrictions designed to curb the spread of covid-19 too slowly. He singled out Pennsylvania, a battleground state with a Democratic governor. Tom Wolf tweeted back: “The politicians who are encouraging us to quit the fight are acting in a most cowardly way.”
- Elon Musk, the founder of Tesla, escalated his clash with local health officials in California. On Monday he announced that his American carmaking factory was swinging back into full production, in defiance of Alameda county’s shelter-in-place orders. Musk engaged several governors in publicly wooing Tesla to quit California and move to any one of their states.
— Coronavirus update:
- Summary: The global case count for Covid-19 stands at 4,197,142 with deaths at 286,669, according to data from the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU). The U.S. case total is at 1,347,936 with 80,684 deaths.
- In Wuhan, China, where the virus was first detected, six new cases of local infection were confirmed over the weekend, ending the surrounding province’s record of zero infections for more than a month. The outbreak marks the first new cases of the virus since April 3. State media has reported that the city plans to test all 11 million of its citizens in a “10-day battle.” Wuhan began to emerge from its 11-week lockdown on April 8.
- The White House directed officials to wear masks at all times inside the West Wing, except at their own desks. Administration officials said President Trump and Vice President Mike Pence aren’t expected to start wearing face coverings.
- Dr. Deborah Birx, the White House coronavirus-response coordinator, said in an email to colleagues that the way the administration initially distributed supplies of the drug remdesivir shouldn’t happen again. Link to WSJ article.
OTHER ITEMS OF NOTE
- DOC publishes notices on Argentina biodiesel. The Commerce Department’s International Trade Administration (ITA) today will publish two notices in the Federal Register on their decision finding no changed circumstances relative to antidumping (AD) and countervailing duties (CVD) on imports of Argentine biodiesel. The notices state that the duties will remain in effect with out adjustment. On the CVD case, ITA said, “Argentina’s export tax regime is in flux, leading Commerce to conclude that there are not sufficient changed circumstances to warrant such an adjustment,” the notice said. “Therefore, Commerce is making no changes to the cash deposit rates as listed in the order.” On the AD situation, ITA said, “Commerce determines that there are insufficient changed circumstances to warrant any changes under the AD Order.”
- Joe Biden and President Trump each raised about $60 million in April, soothing fears among Democrats about their ability to compete financially.
- Largest solar project in the United States. The Department of the Interior has given final approval for Berkshire Hathaway's $1 billion solar project in Nevada that could power 260,000 households, enough to cover the entire residential population of Las Vegas. When finished, the 690 MW Gemini Solar Project would become the world's eighth largest solar power facility in the world, spanning some 7,100 acres of federal land. The developers aim to build the project in two phases over 28 months, with the first portion coming online in early 2021 and final facility completion as early as 2022.
- House Ways and Means Democrats are upset over the Trump administration’s alleged failure to establish a labor enforcement task force as required by the USMCA. In a letter (link) to acting DHS Secretary Chad Wolf and acting CBP Commissioner Mark Morgan, the 25 Ways and Means Democrats said the task force needs to be established immediately, as they missed the deadline “without any explanation.” “In renewing the bonds of North America’s economic and trade relationships and boosting North American competitiveness to meet the challenges posed by China’s authoritarian, non-market-based economic practices, a lax approach to enforcement is unacceptable,” they wrote Monday.
- A new aluminum industry study says increased imports from Canada are making it “unviable” for U.S. smelters to operate, putting pressure on Trump to reimpose Section 232 tariffs on that country or find some other way to restrict the shipments.