Fed Pivots to Stymie Inflation, Prepared to Hike Rates Beginning in March

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USDA to extend Pandemic Cover Crop program | CRP signup announced

 

                                                In Today’s Digital Newspaper

 

Market Focus:
• Markets react to Fed Chairman Powell’s presser
• U.S. GDP grew at 6.9% rate in fourth quarter, but Omicron looms
• Initial jobless claims fell to 260,000 for the week ended Jan. 22
• Trucks are taking over American roads, fueled by rise in pandemic online shopping
• Washing machines, refrigerators and other appliances likely to remain hard to get
• Wall Street’s summer forecast calls for $100 a barrel oil
• Ag trader and analyst Richard Crow on South America crops
• Ag demand update

• Soybeans extend Wednesday’s strong gains
• Russia halts intervention grain sales
• Gaps filled in cattle futures, now what?
• Limited corrective selling in hog futures  

Policy Focus:
• USDA sets CRP general signup, Grassland CRP signup periods
• USDA to extend Pandemic Cover Crop program

China Update:
• China will step up support for economy, small firms  
• Export sales to China key on sorghum, soybeans, cotton and pork

Trade Policy:
• WTO panel sides with China in dispute with U.S. over duties, authorizes retaliation

Livestock, Food & Beverage Industry Update:
• Reports indicate HPAI found in additional wild birds 

Coronavirus Update:
• Free N95 masks showing up at pharmacies, stores  

Congress:
• Senate has votes to approve new Supreme Court justice to replace Stephen Breyer

Other Items of Note:
• Russian and Ukrainian negotiators agree to continue ceasefire talks
• North Korea reportedly fired two short-range ballistic missiles into the sea

 

MARKET FOCUS

 

Equities today: Global stock markets were mostly lower overnight. U.S. stock indexes are pointed toward near steady openings. Asian equities posted losses in the wake of the U.S. Fed meeting conclusion. Hong Kong’s Hang Seng Index fell 482.90 points, 1.99%, at 23,807.00. Japan’s Nikkei fell 841.03 points, 3.11%, at 26,170.30. European equity markets are mixed in early dealings. The Stoxx 600 was off 0.2% while regional markets were seeing losses of 0.4% to gains of 0.6%.

     U.S. equities yesterday: Aggressive signals from the Fed forced the Dow into negative territory late in the session. The Dow ended down 129.64 points, 0.38%, at 34,168.09. The Nasdaq edged up 2.82 points, 0.02%, at 13,542.12. The S&P 500 lost 6.52 points, 0.15%, at 4,349.93.

     Stocks 012622

On tap today:

     • U.S. gross domestic product in the fourth quarter is expected to grow at a 5.5% annual pace from the prior quarter. Follow our coverage here. (8:30 a.m. ET) UPDATE: The U.S. economy grew 1.7% in the fourth quarter, a 6.9% annual rate and its largest one-year jump since 1984.
     • U.S. jobless claims are expected to fall to 265,000 in the week ended Jan. 22 from 286,000 one week earlier. Follow our coverage here. (8:30 a.m. ET) UPDATE: Initial jobless claims, a proxy for layoffs, fell to 260,000 for the week ended Jan. 22, a decrease of 30,000 from the revised level the week before, the Labor Department said. The four-week moving average, which smooths volatility, edged slightly higher that same week.
     • U.S. durable goods orders for December are expected to fall 0.6% from one month earlier. (8:30 a.m. ET) 
 
    • USDA Weekly Export Sales report, 8:30 a.m. ET
     • U.S. pending home sales for December are expected to fall 0.8% from the prior month. (10 a.m. ET)
     • Kansas City Fed's manufacturing survey is expected to hold at 24 in January, unchanged from one month earlier. (11 a.m. ET)

Federal Reserve signaled it would begin steadily raising interest rates in mid-March, its latest step toward removing stimulus to bring down inflation. Fed Chairman Jerome Powell said Wednesday that the central bank was ready to raise rates at its March 15-16 meeting and could continue to lift them faster than it did during the past decade. The central bank in 2020 cut short-term interest rates to near zero and started buying bonds to lower long-term rates as the coronavirus pandemic hit the U.S. economy. Officials pledged to hold interest rates near zero until inflation was forecast to moderately exceed 2% and until the labor market returned to levels consistent with maximum employment. Powell indicated that he and his colleagues believe those goals have been met.

     Market impact: The yield on the two-year treasury note, more sensitive to Fed policy, rose from around 1.07% to 1.199% following the press conference. The yield curve shrank to the flattest since 2020 following the FOMC meeting, with two-year Treasuries extending declines today even as 10-year notes rebounded. When short rates, which are more sensitive to Fed actions, rise above long rates, which more closely follow expectations for future economic growth, it is usually a sign of impending recession. The signal that an inverted yield curve sends is something that the central bank probably wants to avoid. The Fed could sell off some of its bonds to try to push up long-term rates, but that could cause other problems, and Powell said yesterday that the Fed didn’t have a plan for that yet. Stocks quickly reversed course as substantial daily gains were swiftly erased. Traders seized on Powell’s comments in the press conference about the current economic expansion being very different to the one the last time the bank tightened and are now pricing in five rate hikes this year. Traders also took note on Powell's statement that the state of the U.S. economy allows the Fed to be more aggressive in its policy moves ahead.

     Bottom line: Powell’s comment yesterday the U.S. labor markets conditions are consistent with maximum employment means that the central bank is firmly focused on reigning in inflation. There will be a PCE Price index and Core PCE Price Index for the fourth quarter which will reflect October and November actual data with an estimate for December. The first estimate of fourth quarter GDP will include the Personal Consumption Expenditures (PCE) Price Index and core PCE Price Index for the quarter, based on the previously released PCE data for October and November and an estimate for December as PCE data for December will be released Friday morning via the Personal Income and Outlays report. Also key in the GDP update will be the level of savings by consumers which has been at a very high rate during pandemic and during the recovery.

     PCE

Washing machines, refrigerators and other appliances are likely to remain hard to get this year as Covid-19 infections continue to fuel supply chain problems, Whirlpool’s chief executive said Wednesday. The company, based in Benton Harbor, Mich., has increased production to meet higher demand but the Omicron variant has extended staffing challenges and order backlogs, said CEO Marc Bitzer. The Covid-19 Omicron variant has spread rapidly around the country, escalating staffing problems for manufacturers as substantial numbers of factory employees call in sick or quarantine.

     Washing

Trucks are taking over American roads, fueled by a rise in pandemic online shopping and disruptions to global supply chains. Along the way they’re chewing up pavement, adding to congestion and infuriating residents, who must contend with 18-wheelers and delivery trucks as soon as they pull out of their driveways. They’re also causing headaches for state and local governments that face multibillion-dollar bills to finance road upkeep and expansions, the Wall Street Journal reports (link). And road and bridge construction funded by the roughly $1 trillion infrastructure bill that President Biden signed into law last November will mean more construction trucks. It’s also likely that online shopping will keep growing, which means vendors are going to need to beef up their freight capacity.

     Trucking
    Roads

Market perspectives:

     • Outside markets: The U.S. dollar index was firmer ahead of U.S. economic data with the euro and British pound weaker against the greenback. The yield on the 10-year U.S. Treasury note has eased to trade around 1.84% amid a firmer tone in global government bond yields. Gold and silver futures are seeing sizable losses ahead of U.S. economic updates, with gold under $1,805 per troy ounce and silver under $23.05 per troy ounce.

     • Crude oil futures are higher ahead of U.S. market action, with U.S. crude around $88 per barrel and Brent around $89.35 per barrel. Crude was under pressure in Asian action, with U.S. crude was down 43 cents at $86.92 per barrel and Brent was down 47 cents at $88.27 per barrel.

     • Wall Street’s summer forecast calls for $100 a barrel oil. Early in the pandemic, prices fell to uncharted depths. But the bust ended last year and analysts now expect oil demand to return to pre-pandemic levels this year and say that prices need to rise higher yet to entice U.S. producers to drill more wells.

        Oil 100

     • Ag demand: Japan purchased 25,431 MT of Australian wheat in its weekly tender.

     • Ag trader and analyst Richard Crow on South America crops: “The soybean market is trading South America's crop size. Various estimates are around based on reports coming from each state. The Rio Grande is the worse, yet they have some late-planted beans; Parana is second in line, Mato Grosso dol Sol is next. The wild card is how much, if any, of the crop has been lost due to extreme wetness to the north. The crop size estimates vary from 137 million tons to as low as 124 million tons. The market is moving toward a low 130 million tons. HIS Markit released their survey of new crop U.S. acreage possibility. The survey showed bean acreages unchanged from last year. A Brazil crop of 130 and an unchanged U.S. soybean acreage would put beans into a deficit. If soybeans rally to pull away from corn, corn acreage becomes an issue. Brazil's soybean crop has become a dominant variable. The Argentina weather forecast has turned dry for Feb in the long-run estimates. Feb is a crucial month for Argentina production.”

     • NWS weather: A reinforcing surge of arctic air will engulf the eastern half of the nation during the next couple of days... ...An area of light snow is forecast to develop over the Mid-Atlantic and central Appalachians as a large coastal storm forms rapidly off the East Coast.

        NWS 022722
        Wx 012722

Items in Pro Farmer's First Thing Today include:

     • Soybeans extend Wednesday’s strong gains
     • Russia halts intervention grain sales
     • Gaps filled in cattle futures, now what?
     • Limited corrective selling in hog futures  

 

POLICY FOCUS


— USDA sets CRP general signup, Grassland CRP signup periods. USDA will hold a general signup for the Conservation Reserve Program (CRP) Jan. 31-March 31 and a Grassland CRP signup April 4-May 13. USDA said that 4.6 million acres had been enrolled in CRP during 2021, with 1.88 million enrolled via a general signup and 2.5 million that were put in the program via the Grassland CRP effort.

     At the end of December, there were 22.1 million acres of land in the CRP, down slightly from 22.25 million at the end of November.

     USDA said their goal was to “reach the 25.5-million-acre cap statutorily set for fiscal year (FY) 2022.

     Farmers can also enroll acres into the program via the Continuous CRP effort with 19,385 acres enrolled so far in FY 2022. There were 864,594 acres enrolled via the Continuous CRP effort in FY 2021.

     There are contracts on 3.98 million acres that are set to expire under CRP as of Sept. 30, including 3.42 million acres enrolled via general signups and 560,000 via Continuous CRP efforts.

     Perspective: Despite USDA’s declaration that they are seeking to get program acreage near the cap of 25.5 million in FY 2022, the program was still well shy of the FY 2021 cap of 25 million acres — there were 20.5 million acres in CRP as the end of September, with contracts on 2.99 million acres maturing as of Sept. 30. It is not clear how USDA intends to move the acreage level substantially higher on CRP given that many of the contracts that expire in the program often are offered for re-enrollment under new contracts. CRP is a major part of the Biden administration’s strategy to use agriculture to reduce greenhouse gas emissions. Future incentives to idle acreage could be part of coming carbon mitigation programs relative to a slimmed down Build Back Better program that could still be passed by Congress.

— USDA to extend Pandemic Cover Crop program. USDA’s Risk Management Agency (RMA) has forwarded to the Office of Management and Budget (OMB) a final rule on the Pandemic Cover Crop Program (PCCP), presumably making that a permanent crop insurance option for producers. USDA launched the effort in 2021 and indicated 12.1 million acres were covered in 2021. But the effort was only available for the 2021 crop year as it was authorized under the December Covid aid package. Under the 2021 effort, farmers had to report their cover crop acreage to the Farm Service Agency (FSA) by June 15, 2021, to receive the premium benefit which was at $5 per acre but could not exceed the full premium owed. USDA allocated $20 million for the effort and it is not clear how much was actually spent. Crops insured under Whole Farm Revenue Protection, Supplemental Coverage Option, Enhanced Coverage Option, and Hurricane Insurance Protection—Wind Index policies or endorsements were not eligible for the program, but underlying policies were eligible for PCCP. Stacked Income Protection Plan (STAX) and Margin Protection (MP) policies were only eligible when insured as a standalone policy. STAX and MP endorsements to underlying policies were not eligible.

 

CHINA UPDATE


— China will step up support for economy, small firms. Beijing will adopt effective measures to tackle economic challenges and stabilize market expectations, while rolling out more tax and fee cuts and lower financing costs for small firms, Premier Li Keqiang said. China’s industrial firms saw December profits grow 4.2%, down from 9.0% growth in November and the slowest pace in more than a year and a half, pointing to cooling demand amid mounting economic challenges. The data adds to expectations of strong supportive measures from the People’s Bank of China in the coming months.

— Export sales to China key on sorghum, soybeans, cotton and pork. U.S. export sales to China for the week ended Jan. 20 included amounts for sorghum, soybeans, upland cotton and pork. For 2021-22, net sales of 7,735 tonnes of corn, 202,500 tonnes of sorghum, 540,219 tonnes of soybeans, and 59,194 running bales of upland cotton. There were also sales of 198,000 tonnes of soybeans to China for 2022-23. For 2022, there were net sales of 641 tonnes of beef and 16,923 tonnes of pork.

 

TRADE POLICY


— WTO arbitration panel sides with China in dispute with U.S. over duties, authorizes retaliation. China can hit $645 million in U.S. goods with retaliatory tariffs in the wake of a decision by a WTO arbitration panel over U.S. tariffs imposed on a host of Chinese products between 2008 and 2012. The U.S. maintained the duties it imposed on the Chinese goods like solar panels were because they were produced with unfair subsidies. But China won its case brought at the WTO over the U.S. actions.

     The two sides have been unable to reach agreement on how to resolve the matter. China initially requested approval to hit $2.4 billion in U.S. goods with tariffs but later reduced that to $789 million; the US argued the retaliation should be $106 million at most.

     The Office of the U.S. Trade Representative blasted the WTO decision, but China also reacted. “The WTO ruling once again proved that the U.S. has long violated WTO rules, abused trade remedies and refused to fulfill the international obligations clearly stipulated in WTO rulings and rules,” Commerce Ministry spokesman Gao Feng said at a weekly briefing. It is not yet clear China will pursue the retaliatory actions and what products they may target.

     Separately, the European Union has taken China to the WTO over alleged trade restrictions on Lithuania.

 

LIVESTOCK, FOOD & BEVERAGE INDUSTRY

— 
Reports indicate HPAI found in additional wild birds.
The Delmarva Chicken Association has said in an update to its members that Virginia’s state veterinarian has advised that five wild birds — waterfowl taken by hunters in central and eastern Virginia — were tested and found positive for highly pathogenic avian influenza (HPAI). The birds were hunted January 8 in Henrico and Surry counties. The discoveries come after three wild birds from North and South Carolina were confirmed by USDA’s Animal and Plant Health Inspection Service (APHIS) has having H5N1 HPAI. APHIS is only updating HPAI discoveries in wild birds on a weekly basis so the finds in Virginia have not yet been listed by the agency. Finds in wild birds in the region are not unexpected and poultry producers in the region have been stepping up their biosecurity measures as a result of the findings. There have been no trade interruptions linked to the HPAI cases in wild birds nor have there been any discoveries in in backyard flocks or commercial poultry operations.

 

CORONAVIRUS UPDATE


Summary: Global cases of Covid-19 are at 362,800,134 with 5,628,124 deaths, according to data compiled by the Center for Systems Science and Engineering at Johns Hopkins University. The U.S. case count is at 72,910,879 with 876,066 deaths. The Johns Hopkins University Coronavirus Resource Center said that there have been 537,171,553 doses administered, 210,850,212 have been fully vaccinated, or 64.23% of the U.S. population.

— Free N95 masks showing up at pharmacies, stores. Retailers have started receiving the 400 million free N95 masks to give out to people as part of a plan by President Joe Biden. Masks will be available in coming weeks from participants in the federal pharmacy vaccine program, including Albertsons, Costco, CVS, Kroger, Publix, Rite Aid, Walgreens, and Walmart. Adults can get three free masks per visit a day; with no identification or insurance card required and no sales tax. U.S.-made N95 masks from the federal government’s Strategic National Stockpile are designed to filter out up to 95% of particles in the air. The Department of Health and Human Services is providing the masks as part of the Biden administration’s overall strategy — along with vaccines, boosters, Covid-19 tests, pills, and antibody treatments — to fight the pandemic and keep schools and businesses open.

     Meanwhile, mailed test kits are arriving at homes… this writer got his package today.

 

CONGRESS


— Senate is expected to have votes to approve new Supreme Court justice to replace Stephen Breyer on an expedited timeline. Liberal activists have been pushing for his retirement to give President Joe Biden time to nominate a fellow liberal justice to replace him while Democrats hold as slim majority in the Senate. At 83, Breyer is the oldest justice on the nation’s high court. Senate Majority Leader Chuck Schumer (D-N.Y.) plans to move President Biden’s nominee through the process on a timetable like that used by Republicans to confirm Justice Amy Coney Barrett in 2020. She was confirmed 30 days after then-President Donald Trump made the nomination. Biden is expected to follow through on his promise to nominate the first Black woman to the Supreme Court — and that person will not be current VP Kamala Harris.

     Among the names floated so far are Ketanji Brown Jackson, a U.S. appeals court judge in Washington; Leondra Kruger, a justice on California’s Supreme Court; Michelle Childs, a U.S. district judge in South Carolina; Leslie Abrams Gardner, a U.S. district judge in Georgia; civil rights attorney Sherrilyn Ifill; and even Vice President Kamala Harris. Jackson is considered the most likely choice. The White House is saying Biden plans to nominate someone who is already a judge.

     Bottom line: Currently, six of the nine justices are conservative, so Biden's pick will not change the balance of the court, given that Breyer will almost certainly be replaced with a liberal.

     Background. Ketanji Brown Jackson, 51, is a former Breyer clerk and a federal appeals court judge who was in the middle of politically charged disputes during the Trump era. Jackson was nominated by President Obama to the federal district court in Washington, winning Senate confirmation in 2013. In her most prominent case, she ruled in 2019 that then-White House Counsel Donald McGahn had to testify at a House impeachment hearing. Jackson was nominated by Biden and confirmed by the Senate last year to the D.C. Circuit to take the seat held by now-Atty. Gen. Merrick Garland. The D.C. Circuit has served as a springboard for several future justices, including the current court’s Chief Justice John Roberts and Associate Justices Clarence Thomas and Brett Kavanaugh. Jackson, who grew up in Miami, graduated from Harvard College and Harvard Law School and clerked for two lower-court judges before working for Breyer during the Supreme Court’s 1999-2000 term. Besides working in the appeals unit of the federal public defender’s office in Washington, D.C., she served on the U.S. sentencing commission and has worked for multiple large law firms. On the ag sector front, Jackson, as a federal district judge, issued a decision in 2013 upholding country-of-origin-labeling (COOL) regulations that had been challenged by the meat industry. Congress rescinded COOL requirements for beef and pork in 2015.

     SCOTUS firsts

 

OTHER ITEMS OF NOTE

— Russian and Ukrainian negotiators have agreed to continue ceasefire talks as concerns that Russia will invade Ukraine continue to escalate. Ukrainian Foreign Minister Dmytro Kuleba said Russia has not assembled sufficient forces to a launch full-scale invasion. Officials also say the latest four-way conversation between representatives from Ukraine, Russia, Germany and France has helped broker some hope for peace. Speaking after yesterday’s meeting, Moscow's chief negotiator said the ceasefire must be observed "unconditionally" but that many other issues in eastern Ukraine remained unresolved. Ukraine's negotiator said all parties were in support of a permanent ceasefire, adding they are ready to negotiate around the clock to prevent a war.

     On Wednesday, the Biden administration delivered written proposals to Russia aimed at de-escalating the situation, although on the Kremlin’s key request — that NATO commits not to admitting Ukraine — the U.S. again refused to budge. U.S. Secretary of State Antony Blinken said Washington was prepared to discuss “reciprocal” efforts involving arms control and “transparency” regarding military exercises in Europe, an offer that he said “sets out a serious diplomatic path forward, should Russia choose it.”

     President Biden has said he will not send U.S. troops to Ukraine but has put 8,500 service members on high alert for rapid deployment to NATO countries that border Ukraine. The U.S. government is boosting military aid to Ukraine.

— North Korea reportedly fired two short-range ballistic missiles into the sea off its east coast on Thursday. It is the sixth missile test the nuclear-armed country has carried out this month, one of its busiest ever for weapons testing. The U.S., Japan and South Korea all roundly condemned the tests, which they say violate U.N. Security Council resolutions.


 

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