Bond Futures Reacting to Possibility of Greater Than Expected Fed Rate Hike Ahead

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No Supreme Court decision on Prop 12 petition, wetlands regulation


                                                In Today’s Digital Newspaper


Modified format today as I am in Costa Rica for a speaking event… and some fun.

Market and policy focus:

  • Biden to hold press conference Wednesday at 4 p.m. ET. The event comes amid soaring energy and food bills while the Omicron variant of the coronavirus surges across the country. Meanwhile, Russia is becoming Biden’s worst foreign policy crisis since his hasty retreat from Afghanistan. Now comes a potential Russian invasion of Ukraine. Among post-World War II presidents elected to their first terms, only Donald Trump had a lower average approval rating in his first year, according to Gallup.
  • Senate is running out of options relative to voting rights legislation, as Democratic leaders’ options have all been nixed by centrist Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-Ariz.). Pending votes if they occur will make it clear this is a topic without sufficient party support to avoid a push for filibuster reform.
  • Equities: On Tuesday, the Dow fell 543.34 points, 1.51%, at 35,368.47. The Nasdaq dropped 386.86 points, 2.60%, at 14,506.90. The S&P 500 lost 85.74 points, 1.84%, at 4,577.11. Overnight the MSCI Asia Pacific Index dropped 1.3% while Japan’s Topix index closed 3% lower as the yen strengthened and Sony Group Corp. plunged in the wake of the Microsoft Corp. deal for Activision Blizzard Inc. In Europe the Stoxx 600 Index was slightly higher.
  • Outside markets update: The U.S. dollar index is weaker ahead of U.S. economic updates with the euro and British pound both firmer against the greenback. Crude oil futures remain elevated, with U.S. crude around $86.60 per barrel and Brent around $88.40 per barrel. Crude was higher in Asian action, with U.S. crude trading near $86 per barrel and Brent around $88.50 per barrel. Gold and sliver futures are higher ahead of US trading, with gold around $1,818 per troy ounce and silver around $23.85 per troy ounce.
  • Speculation is growing that the U.S. Fed may deliver more than a quarter-percentage point March interest-rate hike, while the Bank of England may move again next month. Germany’s 10-year yield turned positive for the first time since 2019. Higher bond yields are forcing investors to rethink valuations across a range of assets. Meanwhile, U.S. Treasuries continue to slide, with the yield on the 10-year instrument at 1.888% this morning and investors seeing it hit 2% by March.

    Bond yields

  • On tap today:
    — U.S. housing starts
    are expected to fall to an annual pace of 1.65 million in December from 1.679 million one month earlier. (8:30 a.m. ET)
    — Bank of England Gov. Andrew Bailey appears before the Treasury Committee at 9:15 a.m. ET.
    — Japan's exports for December are expected to increase 15.5% from one year earlier. (6:50 p.m. ET)

  • Inflation in Britain soared to 5.4% in December, the highest rate in nearly 30 years. Consumer prices increased by 5.1% in November. Higher energy costs and supply chain issues have driven up prices. The central bank had increased interest rates in December and will now meet on Feb. 3 to mull another hike.

    UK inflation

  • Canadian businesses are confronting many of the same issues as their U.S. counterparts — including strong demand, labor shortages, supply chain bottlenecks and rising prices. The Bank of Canada's quarterly Business Outlook Survey for the fourth quarter found that more than three-quarters of firms said they would have difficulty meeting an unexpected increase in demand. "For many, these pressures are significant and are reducing firms’ ability to sell," the report said.
  • Crude oil prices continue to gain. Most-active U.S. crude futures rose 1.2% to $85.83 a barrel, extending a rally driven in part by the potential for supply disruptions in Russia and the Middle East. Prices initially retreated as Turkey reopened a key crude pipeline running from Iraq after it was knocked out by an explosion on Tuesday.

    Crude rally

  • Gasoline prices are rising, adding to inflationary pressures and complicating matters for President Biden, who released crude from the strategic reserve in the fall in an attempt to help drivers facing sticker shock. National average gasoline prices stand at $3.314 a gallon, according to AAA, up from $2.386 a year ago.

    Gas prices 

  • Biden continues to press countries on oil supply situation. The Biden administration is continuing to work with oil-producing countries on increasing crude oil supplies to meet demand, according to the White House. The White House said it will continue monitoring prices relative to global growth and keep having discussions with OPEC+ countries as needed, National Security Council spokeswoman Emily Horne said in a statement yesterday. “We continue to work with producer and consumer countries, and these steps have had real effects on prices and ultimately tools continue to remain on the table for us to address prices,” Horne said. The effort comes as crude oil prices have surged to their highest marks in seven years.
  • DOE announces fifth SPR crude exchange. The Department of Energy (DOE) Tuesday (Jan. 18) announced a fifth exchange of crude oil from the Strategic Petroleum Reserve (SPR), this time for 400,000 barrels of crude to Atlantic Trading and Marketing, Incorporated. DOE last week announced an exchange of 870,000 barrels of crude oil for release to Shell Trading (U.S.) Company. This means a total of eight million barrels of crude from the SPR have been exchanged under the effort announced Nov. 23.
  • Global oil demand will exceed pre-pandemic levels this year thanks to growing Covid-19 immunization rates and as recent virus waves haven’t proved severe enough to warrant a return to strict lockdown measures, the International Energy Agency (the IEA) said today. In its monthly oil market report, the IEA hiked its oil demand growth forecast for the coming year by 200,000 barrels a day, to 3.3 million barrels a day. The Paris-based agency also raised its demand growth forecasts for 2021 by 200,000 barrels a day to 5.5 million barrels a day. Total demand this year should stand at 99.7 million barrels a day, around 200,000 barrels a day more than 2019 levels, the IEA said. Last month the IEA was expecting this year’s oil demand to be broadly on par with pre-pandemic levels.
  • China’s zero-Covid policies are disrupting trade routes across its land borders that are lifelines for the region’s farmers and merchants, the Wall Street Journal reports (link). In neighboring Vietnam, thousands of trucks laden with dragon fruit, jackfruit, watermelons and other produce have been backed up at the border awaiting passage for weeks. Their trips were disrupted after Chinese authorities toward the end of last year suspended operations at several gates or slowed traffic citing a need to contain Covid-19. For Vietnam’s farmers and traders, not being able to reach Chinese consumers is crippling.

    Vietnam gains

  • U.S./Russia talks continue. U.S. Secretary of State Antony Blinken will meet with Sergey Lavrov, Russia’s foreign minister, in Geneva on Friday as the two sides explore whether there is still a diplomatic path to avoiding a conflict in Eastern Europe. Negotiating sessions last week ended in an impasse. Meanwhile, Russia revealed it is discussing a joint naval exercise with Iran and China.
  • USDA confirms two more HPAI findings in wild birds. USDA’s Animal and Plant Health Inspection Service (APHIS) has confirmed two additional findings of H5N1 highly pathogenic avian influenza (HPAI) in wild birds — a northern shoveler in Colleton County, South Carolina and a blue-winged teal in Hyde County, North Carolina—both in addition to the one announced Jan. 14 for a wild duck in Colleton County, South Carolina. APHIS earlier Tuesday confirmed the Jan. 14 case was also H5N1. “These findings are not unexpected, as wild birds can be infected with HPAI and show no signs of illness,” APHIS said. The agency said it will post these and all future wild bird HPAI cases on a weekly basis and “no future stakeholder announcements are planned for wild bird findings.” APHIS said those involved with poultry should review their biosecurity plans and enhance their biosecurity practices. There have been no trade disruptions for U.S. poultry from these finds in wild birds.
  • No Supreme Court decisions on ag case petitions involving Prop 12 (sow housing) and federal wetland regulations. The court’s next conference is Friday, the last one for a month.
  • White House: Free N95 masks to be made available at pharmacies. The Biden administration today is expected to announce plans to make 400 million N95 masks available free at pharmacies and community health centers across the country, a White House official said. The nonsurgical N95 masks will start to be available at pharmacies and community health centers late next week and the program will be fully up and running by early February, the White House official said. The masks will be sourced from the Strategic National Stockpile, the nation’s safety net of medical-equipment supplies.
  • Global cases of Covid-19 are at 334,395,897 with 5,556,167 deaths, according to data compiled by the Center for Systems Science and Engineering at Johns Hopkins University. The U.S. case count is at 67,597,794 with 854,074 deaths. The Johns Hopkins University Coronavirus Resource Center said that there have been 529,266,561 doses administered, 209,312,770 have been fully vaccinated, or 63.76% of the U.S. population.
  • Slight shifts in CFAP payouts continue. Total payments under the Coronavirus Food Assistance Program 2 (CFAP 2) edged up to $19.07 billion as of January 17 ($19.06 billion prior), including $14.24 billion in original CFAP 2 payments ($14.23 billion prior) and $4.82 billion in top-up payments. Total CFAP 1 payments are now at $11.76 billion, up from $11.75 billion the prior week, including $10.57 billion in original CFAP 1 payouts ($10.56 billion prior) and $1.19 billion in top-up payments.
  • USDA agency seized more than $1.7 million in prohibited agricultural products in 2021. USDA’s Animal and Plant Health Inspection Service’s (APHIS) Smuggling Interdiction and Trade Compliance (SITC) program seized 224,568 pounds of prohibited agricultural items valued at over $1.7 million in 2021, the agency said. They said that included 1,900 pounds of prohibited pork, poultry and ruminant products in the New York City area that were seized during October-December.
  • Forest Service to fight wildfires with new plan. The U.S. Forest Service will use forest thinning and controlled burns to thin overgrown national forests as part of its 10-year strategy to reduce wildfire risks on an additional 20 million acres of national forests and grasslands in the West, USDA Secretary Tom Vilsack said Tuesday. Vilsack and Forest Service Chief Randy Moore released a plan they said lays the ground for a “paradigm shift” in how the Forest Service will combat contributing factors to catastrophic fires that have burned millions of acres, destroyed towns and forced the evacuation of thousands of people in the West. The Forest Service is part of USDA. They said the goal is to treat up to 20 million acres of Forest Service lands and to support efforts to treat an additional 30 million acres of state, local, tribal and private lands. Kate Waters, a Vilsack spokeswoman, said the estimated cost for completing work on the 20 million acres of Forest Service land is $20 billion over 10 years and $30 billion for work on federal, state, tribal and private land.
  • Two more House Democrats not running for re-election. Reps. Jim Langevin (D-R.I.) and Jerry McNerney (D-Calif.) announced Tuesday they will not seek another in the House. This brings the number of House Democrats not seeking re-election or running for a different office to 28. There are also 13 House Republicans who have said they will not seek another term in the chamber in November.
  • AT&T and Verizon agreed to delay activating 5G wireless services near some airports after airlines complained that the technology would interfere with airplane equipment. Several international carriers had suspended some flights to America starting Wednesday. The delay marks the third postponement by the telecoms firms in what has been a long-running standoff.
  • Antitrust laws. The Federal Trade Commission and U.S. Justice Department announced yesterday they are reviewing guidelines for corporate mergers and will announce updated rules by the end of the year. The move is an effort to combat the concentration in a range of industries that can reduce competition and consumer choice. Decades of less aggressive antitrust enforcement has led to an increase in merger filings, which nearly doubled from 2020 to 2021. 
  • NWS weather: There is a Slight Risk of severe thunderstorms over parts of the Lower Mississippi Valley through Thursday morning... ...Light snow from parts of the Middle Mississippi, Southern Ohio Valleys, and the Mid-Atlantic; light to moderate snow over parts of the Northeast on Wednesday... ...There is a Risk of rain/freezing rain over parts of the Southern Ohio/Tennessee Valleys and Middle/Lower Mississippi Valley on Wednesday... ...There is a Risk of scattered rain/freezing rain over parts of the Western Gulf Coast to the southern Mid-Atlantic on Thursday.

NWS 011922


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