Ukraine Hopes First of Grain Shipments on Wednesday, But Others are Skeptical

Yellen insists recession is avoidable as White House downplays GDP report Thursday

Ukraine advanced into occupied Kherson region, says Ukrainian president Volodymyr Zelenskyy, who said Sunday his forces are advancing "step by step" into the occupied Kherson region. Kherson city, an important economic center and strategic port on the Black Sea, was captured by Russia early in the war. A Ukrainian official claimed on Sunday the southern region will be ‘definitely liberated’ from Russia by the end of summer.

Russia accused of attacking Odesa Port — jeopardizing days-old ‘paper agreement’ grain deal. Ukraine said it’s still moving forward with its plan to resume grain exports. We issued a special report on the topic on Saturday and then filed some updates on Sunday via The Week Ahead dispatch. We have more updates in the Russia/Ukraine section. Focus remains on implementation of agreement to allow resumption of grain shipments from Ukrainian ports via the Black Sea, with a senior Ukrainian government official on Monday saying they hope the first of such shipments would take place Wednesday from the port of Chornomorsk. Officials from Ukraine’s Infrastructure Ministry also said they would be ready to work on grain exports from all ports under the agreement within two weeks, according to a report from Reuters. They also expressed a hope that internal documents would be agreed to today or Tuesday with the joint coordination center will be ready to work from Wednesday.

Senate Dems are continuing to work on a reconciliation measure. As soon as today, the Senate parliamentarian could give guidance on whether Dems’ plan to allow Medicare to negotiate drug prices is permissible via reconciliation.

The U.S. Treasury secretary insisted a recession is avoidable. Janet Yellen pointed to healthy labor market figures to support her argument. Yellen said she’s not saying the U.S. will avoid a recession. The U.S. is likely to see a slowdown of job creation, but she said, “I think there is a path that keeps the labor market strong and brings inflation down.”

Investors are betting that the Federal Reserve will need to cut interest rates next year.

China could declare a no-fly zone over Taiwan to prevent a potential visit by U.S. Speaker of the House Nancy Pelosi in the coming weeks, CNN reported.

“We are watching a potential train crash between the U.S., Mexico and Canada,” Kenneth Smith Ramos, who was Mexico’s chief USMCA negotiator through 2019, said in an interview with Bloomberg. Details in Trade Policy section.

Growth Energy and the Environmental Protection Agency (EPA) submitted a consent decree agreement to the US District Court for the District of Columbia that requires EPA to propose the 2023 renewable fuel volume requirements under the Renewable Fuel Standard (RFS) no later than November 16, 2022, and to finalize those requirements no later than June 14, 2023.

An intense heat wave scorched large parts of the U.S. in the aftermath of extreme temperatures reported across the globe last week.

The World Health Organization (WHO) on Saturday declared the monkeypox outbreak a global public health emergency.

Polls show a tightening in the Texas governor’s race between Greg Abbott, the incumbent, and Beto O’Rourke, his Democratic challenger.

Equities today: U.S. equities markets indicated a positive open Monday. Second-quarter U.S. earnings season ramps up this week, with more than 150 S&P 500 firms report including all five big tech names. In Asia, Japan -0.77%. Hong Kong -0.22%. China -0.60%. India -0.39%. In Europe, at midday, London +0.01%. Paris +0.07%. Frankfurt -0.02%.

     U.S. equities Friday: The Dow shed 138 points, or 0.4%, to finish at 31,899. The S&P 500 fell 37 points, 0.9%, to close near 3,962 after briefly trading above 4000 shortly after the open. The Nasdaq slipped nearly 226 points, 1.9%, to close at 11,834.

     For the week, the Dow was up 2%, the S&P gained 2.6%, and the Nasdaq was up 3.3%.

Agriculture markets Friday:

• Corn: December corn futures fell 9 1/4 cents to $5.64 1/4, down 39 1/2 cents for the week and the contract’s lowest closing price since $5.62 1/4 on Jan. 20.
• Soy complex: November soybeans rose 14 1/4 cents to $13.15 3/4, after rebounding from a six-month low of $12.88 1/2 overnight. The contract was still down 26 1/2 cents for the week. August soymeal fell $2.90 to $431.50 and August soyoil rose 172 points to 60.32 cents.
• Wheat: September SRW futures fell 47 1/4 cents to $7.59, down 17 3/4 cents for the week. September HRW futures fell 41 cents to $8.20 1/4, down 17 1/4 cents for the week. September spring wheat fell 41 1/2 cents to $8.71.
• Cotton: December cotton fell 71 points to 90.89 cents per pound, a weekly gain of 218 points.
• Cattle: August live cattle rose $1.65 to $137.375, the highest closing price since June 8 and a gain of $2.725 for the week. August feeder cattle rose $3.275 to $181.55, a five-month closing high.
• Hogs: August lean hogs jumped $2.40 to $118.70, up a sharp $8.875 for the week and the contract’s highest closing price since April 19. The CME lean hog index rose 67 cents Friday to a 13-month high at $117.04 (as of July 20) and is expected to hit $118.16 today.
   

Ag markets today: Grain and soy futures firmed overnight amid concerns about the deal to restart Ukraine’s grain exports and forecasts calling for a return of heat and dryness after some temporary relief. As of 7:30 a.m. ET, corn futures were trading 10 to 11 cents higher, soybeans were 10 to 12 cents higher, winter wheat futures were 20-plus cents higher and spring wheat was mostly 13 to 19 cents higher. Front-month U.S. crude oil futures were around $1 higher and the U.S. dollar index was about 475 points lower this morning.

On tap today:

     • USDA Food Price Outlook, 9 a.m. ET.
     • Dallas Fed's manufacturing survey is expected to fall to minus 10 in July from minus 17.7 one month earlier. (10:30 a.m. ET)
     • USDA Grain Export Inspections report, 11 a.m. ET.
     • USDA Crop Progress report, 4 p.m. ET.
     • South Korea's gross domestic product for the second quarter is expected to increase by 2.6% from one year earlier. (7 p.m. ET)

Treasury Secretary Janet Yellen expressed confidence in the Federal Reserve’s fight against inflation and said she doesn’t see any sign that the U.S. economy is in a broad recession. “We’re likely to see some slowing of job creation,” Yellen said Sunday. “I don’t think that that’s a recession. A recession is broad-based weakness in the economy. We’re not seeing that now.” Yellen said she’d “be amazed if the [National Bureau of Economic Research] would declare this period to be a recession even if it happens to have two quarters of negative growth.” The NBER is responsible for declaring whether the economy is in a recession or not. “I’m not saying we will definitely avoid a recession, but I think there is a path that keeps the labor market strong and brings inflation down,” Yellen concluded.

     Meanwhile, former Treasury Secretary Lawrence Summers said Federal Reserve officials need to stay the course to quell inflation that’s proving persistent at a four-decade high. “We do need strong action from our central bank,” he said Sunday.

Biden administration already downplaying coming GDP report. On Thursday, GDP numbers for the second quarter will be released, and economists expect they’ll show a decline of 1% to 2%. It would be the second straight quarter of decline — which is often seen as signaling a recession. The Biden administration is prebutting the expected bad GDP news. “I do want to emphasize: What a recession really means is a broad-based contraction in the economy,” Treasury Secretary Janet Yellen said on NBC’s Meet the Press on Sunday. “And even if that [Q2 GDP] number is negative, we are not in a recession now. And I would, you know, warn that we should [not be] characterizing that as a recession. … Most of the data that [the National Bureau of Economic Research] look[s] at right now continues to be strong.”

     Meanwhile, Brian Deese, head of the National Economic Council, wrote in a Sunday afternoon Twitter thread: “The economy created 1.1 million jobs in Q2. That's simply not consistent w/ a recession, where historically the economy is consistently LOSING jobs. … Looking ahead, the global economy faces significant challenges. But with a strong labor market and household finances, the U.S. can transition without giving up all the econ gains of the past 18 [months].”

Signs that price pressures are easing suggest that June’s 9.1% increase in consumer prices will probably be the peak, the Wall Street Journal reports (link). But even if inflation indeed comes down, economists see a slow pace of decline. Gasoline prices have fallen around 10% from their mid-June high point, wheat futures prices have fallen by 37% since mid-May and corn futures prices are down 27% from mid-June. The cost of shipping goods from East Asia to the U.S. West Coast is 11.4% lower than a month ago. Easing price pressures and improvements in backlogs and supplier delivery times in business surveys suggest that supply-chain snarls are unraveling.

     “It’s a step in the right direction, but ultimately, even if June is the peak, we’re still looking at an environment where inflation is too hot,” said Sarah House, senior economist at Wells Fargo, who expects fourth-quarter inflation between 7.5% and 7.8%. “So peak or not, inflation is going to remain painful through the end of the year.”

    

Investors are betting that the Federal Reserve will need to cut interest rates next year. Wall Street investors are betting that officials will raise interest rates aggressively through the end of the year — and then turn around and start cutting them in six months, the Wall Street Journal reports (link). The unusual wager reflects investors’ growing sense that the Fed is driving the economy into a recession as it tries to fight inflation, analysts said. At the same time, by constraining longer-term borrowing costs, it makes a recession slightly less likely to happen soon. Interest-rate derivatives as of Friday showed investors expect the Fed to raise its benchmark federal-funds rate by three-quarters of a percentage point on Wednesday. The Fed is subsequently expected to lift the fed-funds rate to around 3.3% by the end of the year. But investors expect no further increases after that. And they are betting that the Fed will be cutting rates by June, bringing short-term rates to roughly 2.5% by the middle of 2024.

The Congressional Budget Office will publish the “2022 Long-Term Budget Outlook” on Wednesday afternoon. This includes spending, deficit and debt projections for the next 30 years.

Market perspectives:

     • Outside markets: The U.S. dollar index was about 475 points lower this morning. The yield on 10-year Treasuries advanced five basis points to 2.80%. West Texas Intermediate crude rose 1% to $95.67 a barrel. Gold futures were little changed.

     • The U.S. is likely to face more yield-damaging heat this month, said Jon Davis, chief meteorologist at Everstream Analytics, a supply-chain risk-management company. Corn in the pollination stage begins to be stressed to the point of yield losses when temperatures exceed the mid-90s for several days with no relief during the night, he said.

     • Intense heat and dry conditions are stressing U.S. agriculture, threatening corn, soybeans and other crops, as well as cattle herds. Scorching temperatures this past week have put swaths of the U.S., especially in the South and West, under excessive-heat warnings and advisories. The hot weather is hitting during an important period of the Midwest crop-growing season, analysts said, and just as some commodity prices ease amid concerns about global food supplies, the WSJ reports (link).

     • NWS weather: Excessive heat to continue across portions of the Southern Plains and Lower Mississippi Valley early week; Pacific Northwest heat wave to kickoff this week.... ...Stormy and soaking weather pattern to setup from the Middle Mississippi Valley to the central Appalachians... ...Monsoonal moisture to cause daily rounds of excessive rainfall and flash flooding across portions of the Southwest and Southern Rockies through mid-week.

Items in Pro Farmer's First Thing Today include:

     • Firmer tone to start the week
     • Some weather relief this week, but heat and dryness will return
     • Cattle report data mostly neutral
     • Cold Storage Report: Record June beef stocks
     • August hog futures premium to cash index

— Summary: “Now, it is possible to shoot down some of the missiles,” Ukrainian President Volodymyr Zelenskyy said in a video posted online late Saturday night. “The goal is to shoot down each one. And we will do everything necessary to still get modern and effective air-defense systems.” Ukrainian forces are preparing their counteroffensive in the south, where they have already retaken several villages. Regaining control of the southern region and the city of Kherson, the only Ukrainian regional capital that Moscow captured in five months of fighting, would hand Kyiv access to another major port hub through which to export grain via the Black Sea.

• Moldova’s prime minister, Natalia Gavrilița, said she is “very worried” that her country could be invaded next, if Russia takes Odesa. “This is a risk, it’s a hypothetical scenario for now, but if the military actions move further into the southwestern part of Ukraine and toward Odesa, then of course, we are very worried,” Gavrilița said.
• Russia hits port hours after grain-export deal. Russia launched a missile attack on Ukraine’s key grain-exporting port of Odesa, hours after signing a deal to ease its blockade and allow for the safe transport of grain necessary. Russia confirmed it had struck the city, which is harboring vessels loaded with tons of grain awaiting export, claiming it was aiming at military targets, including a stockpile of U.S.-supplied missiles. We filed a special report on the development on Saturday and some updates on Sunday via The Week Ahead.
  
  Now what? Ukraine says it has not given up hope that the deal will proceed, with Infrastructure Minister Oleksandr Kubrakov insisting that Kyiv is pushing ahead with plans to move ships out of the Black Sea ports as early as today. The deal struck Friday establishes “safe corridors” to allow the vessels to pass in and out of three designated ports. A joint coordination center has been set up in Turkey, manned by Turkish, Russian and U.N. officials. Turkish officials said they expect it will be up and running by today.
  
  Visiting Cairo, Russia’s foreign minister, Sergei Lavrov, assured his Egyptian counterpart that his country would honor its commitment to allow the export of grain via the Black Sea to resume. Awkwardly, his ministry also confirmed that Russian cruise missiles had struck Odessa’s port the day after the deal was struck, casting doubt on the viability of its promise to unblock grain stockpiled in Ukraine. Last year Egypt bought four-fifths of its imported wheat from Russia and Ukraine. In a newspaper article published in four African countries to coincide with his visit, Lavrov praised Africa for not joining the West in imposing sanctions on Russia. Lavrov began a tour of four African countries yesterday. He is visiting Egypt, Ethiopia, Uganda and the Republic of Congo this week, where he seeks to blame the West for war-related grain shortages, which have sparked fears of famine.
  
  WSJ commentary on Russia and the grain shipment deal: “The deal was no act of Russian charity. It was probably aimed at deterring a U.S.-led naval escort of Ukrainian grain exports. Pressure was increasing for such an effort as food shortages grow around the world and political unrest follows. Ukraine accounted for 9% of global wheat exports before the war, and poor countries are among the biggest customers. Russia also benefits from the deal. The U.N. said the agreement ‘paves the way for Russian food and fertilizer to reach the global markets,’ providing more money to finance the war. It bears watching whether Russia insists on taking a cut of the grain-sale payments in return for Black Sea passage.”
  
  Wheat market impact: Wheat prices jumped after Russia attacked the sea port of Odesa with cruise missiles at the weekend, just hours after signing a deal to unblock grain exports from Ukraine. Futures in Chicago surged as much as 4.6% before paring gains on Monday. Prices already slumped almost 6% on Friday to close at the lowest level since early February after the agreement was reached. Meanwhile, Ukrainian officials accuse Moscow of stealing at least 500,000 tons of Ukrainian grain, worth about $100 million, and shipping  it off via captured ports.
  
  Daejin Lee, lead shipping analyst at S&P Global Market Intelligence, predicts that exports will continue to favor Danube River ports over the Black Sea. “The food inflation risk with global grain shortage is expected to continue in the near term until the passage from the major grain seaports in Odesa region fully return to normal,” Lee said in a note.

• U.S. Secretary of State Antony Blinken condemned the missile strike in a statement Saturday afternoon, in which he accused Russia of violating the shipment deal it had made. "Just 24 hours after finalizing a deal to allow the resumption of Ukrainian agricultural exports through the Black Sea, Russia breached its commitments by attacking the historic port from which grain and agricultural exports would again be transported under this arrangement," Blinken's statement read. "The Kremlin continues to show disregard for the safety and security of millions of civilians as it perpetuates its assault on Ukraine. Russia is starving Ukraine of its economic vitality and the world of its food supply through the effective blockade of the Black Sea." Blinken said the attack “casts serious doubt on the credibility of Russia’s commitment to yesterday’s deal and undermines the work of the U.N., Turkey and Ukraine to get critical food to world markets.”

— China could declare a no-fly zone over Taiwan to prevent a potential visit by U.S. Speaker of the House Nancy Pelosi in the coming weeks, CNN reported. In response to reports of the visit, China's Ambassador to the United States Qin Gang on July 20 criticized Washington for "hollowing out" the one-China principle, Caixin reported July 22. Pelosi (D-Calif.), a longtime China hawk, has declined to discuss the potential trip, citing security reasons. But she told reporters last week that “it’s important for us to show support for Taiwan.” Chinese officials have reportedly issued strong warnings to their U.S. counterparts ahead of a possible trip to Taiwan by Pelosi. According to the Financial Times, the admonitions “were significantly stronger than the threats that Beijing has made in the past when it was unhappy with U.S. actions or policy on Taiwan.” President Joe Biden’s only comments on the potential trip came after Pelosi was given a Pentagon briefing. Biden said that “the military thinks it’s not a good idea right now” for Pelosi to go.

— The growth of China’s population, slowing for years, is now expected to go into decline sometime before 2025, according to a senior health official cited by the nationalistic Global Times. Some observers think the peak has been passed already, but China’s government has denied it. Last year laws were changed to allow mothers to bear three children — to little avail.

— Indonesian President Joko Widodo arrives in China today, kicking off a three-country tour which will include stops in Japan and South Korea. Widodo is scheduled to meet with Chinese President Xi Jinping on Tuesday, which will make him the first foreign leader to meet with the Chinese president since the Winter Olympics in February.

— “We are watching a potential train crash between the U.S., Mexico and Canada,” Kenneth Smith Ramos, who was Mexico’s chief USMCA negotiator through 2019, said in an interview with Bloomberg. “Mexico would need to completely overhaul two pieces of legislation that are essential to AMLO.” U.S. and Canadian companies have been pressing for action against Mexico’s nationalist energy policies. President Andrés Manuel López Obrador, known as AMLO, has made strengthening Mexico’s state energy companies at the expense of private firms the hallmark of his administration. His insistence could lead to a protracted trade spat under the U.S.-Mexico-Canada Agreement, known as USMCA. Former negotiators of the accord say the dispute would cost Mexico between $10 billion and $30 billion in tariffs.

     The fallout of a lengthy battle may put investment opportunities at risk for the entire region just as supply chain disruptions from Asia are expected to significantly energize trade within North America.

     Obrador on Friday said that Mexico’s trade relationship with the U.S. can’t come “at the cost of our dignity.” He has insisted his energy policy doesn’t violate the USMCA and said he’ll announce his formal response to the complaint at a military parade to commemorate Mexico’s Independence Day on Sept. 16.

     Impact: “Given how strongly López Obrador feels about his protectionist policies in the energy sector, it is unlikely that an agreement will be reached,” said Carlos Petersen, a political analyst at Eurasia Group. “This will not jeopardize USMCA as a whole but will certainly create tensions and potential retaliatory measures from the U.S. and Canada.”

— Special Presidential Envoy for Climate John Kerry told the New York Times that Biden is “very close” to declaring a national emergency on climate. It’s a matter over when — not if — that should happen, Kerry said.

— Growth Energy, EPA reach agreement on 2023 RFS requirements, Growth Energy and the Environmental Protection Agency (EPA) submitted a consent decree agreement to the U.S. District Court for the District of Columbia that requires EPA to propose the 2023 renewable fuel volume requirements no later than Nov. 16, 2022, and to finalize those requirements no later than June 14, 2023, Growth Energy said in a news release Friday. The court is expected to approve the agreement in the coming weeks. The consent decree follows Growth Energy’s notice of intent to sue and filing of a complaint in federal district court in response to the agency’s violation of the statutory deadlines to issue renewable fuel volume requirements for the Renewable Fuel Standard (RFS) program.

     Growth Energy added: “For 2023 and beyond under the RFS, EPA, in coordination with the U.S. Department of Energy (DOE) and the U.S. Department of Agriculture (USDA), is required to set renewable fuel volume requirements through rulemaking, taking into consideration six statutory factors, including environmental, economic, and energy security… EPA is required to set the 2023 volume requirements at least 14 months prior to the calendar year in which they are to take effect. For 2023, EPA was required to finalize the 2023 renewable fuel volume requirements by Nov. 1, 2021.”

— Summary:

• Global Covid-19 cases at 570,218,790 with 6,384,415 deaths.
• U.S. case count is at 90,410,386 with 1,026,951 deaths.
• Johns Hopkins University Coronavirus Resource Center says there have been 601,497,801 doses administered, 222,950,194 have been fully vaccinated, or 67.67% of the U.S. population.

— Monkeypox is a global emergency, U.N. health agency chief says. The chief of the World Health Organization said the expanding monkeypox outbreak in more than 70 countries is an “extraordinary” situation that now qualifies as a global emergency. WHO Director-General Tedros Adhanom Ghebreyesus made the decision to issue the declaration despite a lack of consensus among experts serving on the U.N. health agency's emergency committee. It was the first time the chief of the U.N. health agency has taken such an action. “We have an outbreak that has spread around the world rapidly through new modes of transmission about which we understand too little, and which meets the criteria in the international health regulations,” Tedros said. “I know this has not been an easy or straightforward process and that there are divergent views among the members" of the committee, he added. A global emergency is WHO's highest level of alert, but the designation does not necessarily mean a disease is particularly transmissible or lethal. WHO previously declared emergencies for public health crises such as the Covid-19 pandemic, the 2014 West African Ebola outbreak, the Zika virus in Latin America in 2016 and the ongoing effort to eradicate polio. The U.S. currently has nearly 3,000 cases. WHO’s top monkeypox expert, Dr. Rosamund Lewis, said this week that 99% of all the monkeypox cases beyond Africa were in men and that of those, 98% involved men who have sex with men. Experts suspect the monkeypox outbreaks in Europe and North America were spread via sex at two raves in Belgium and Spain.

— Polls show a tightening in the Texas governor’s race between Greg Abbott, the incumbent, and Beto O’Rourke, his Democratic challenger.

— The House congressional committee probing the Capitol riot of January 6 plans to interview additional witnesses, including former members of Donald Trump’s cabinet, in preparation for more hearings in September. Rep. Liz Cheney (R-Wyo.), the panel’s vice-chairwoman, said she would consider subpoenaing Ginni Thomas, the wife of Clarence Thomas, a justice on the Supreme Court. She also said the committee may also refer the former president for criminal prosecution.

— Drought bill on tap this week in House. The House plans action this week on a legislative package — consisting of more than 40 bills — to address wildfire risks, droughts, and environmental justice.

— The Senate is expected to hold another vote today on a bill to boost American semiconductor production, as well as fund research in water systems, technology and behavioral health, precision agriculture, and technology education, as part of a broader $280 billion package to beef up U.S. competitiveness. The legislation includes $52 billion in subsidies for chip makers. Lawmakers are aiming to pass the semiconductor bill before leaving for their monthlong August recess, and before other countries lure chip manufacturers with their own incentives. China leads the world in investing in new chip factories, building 31 major factories through 2024, as it seeks to curb its need for imports, according to the chip-industry group SEMI. Taiwan is building 19, and the U.S. is building 12, the Wall Street Journal reported.