Washington Insider -- Monday

Probably Not a Recession

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Reuters: China Granting Tariff Exemptions for Some Ag Products

Some Chinese crushers have applied for and been granted tariff exemptions to import soybeans, according to sources cited by Reuters, with the exemptions in place for a year in line with an announcement from the Chinese government last month.

The report also said exemptions have bene granted for U.S. sorghum, wheat and distillers’ dried grains (DDGs). U.S. Dairy Export Council President and CEO Tom Vilsack said this week that exemptions for dairy products were also being granted.

The report indicated there were no issues for importers to get the exemptions with the government announcement of the exemption availability signaling a decision would be made within a matter of days after the request for the one-year exemption was made.

The report indicated the expectation was that U.S. soybeans would likely be eyed for August-September forward.

DOE Chief Expects China To Live Up To Phase One Energy Purchase Commitments

The coronavirus situation is not expected to keep China from fulfilling its pledge to buy more U.S. energy products under the phase-one trade deal between the two countries, according to Energy Secretary Dan Brouillette.

Asked if the situation will impact those purchase commitments, Brouillette said, “It is hard to tell. I do not have any expectations at the moment that it will.” He added he thinks “the Chinese have every intention of honoring their agreements.” While the U.S. could see some impact on overall energy demand, he reiterated “there is no expectation that someone is not going to honor their agreements.”

He made the comments at a briefing with International Energy Agency (IEA) Executive Director Fatih Birol who noted the group has “revised” its global oil demand expectations “significantly.” Since China accounted for 80% of demand growth for crude oil last year, Birol noted their economic downturn will have an outsized impact on oil demand expectations.

"Coronavirus is affecting oil markets disproportionately more seriously than the global economy,” he observed. As for U.S. shale oil production, Brouillette said it was too soon to tell if there will be a significant impact.

Washington Insider: Probably Not A Recession

There’s a lot of talk about the virus, the outbreak and the economic impacts expected these days. For example, Bloomberg reported this weekend that after days of playing down coronavirus risks, the administration shifted ground on Friday and “opened the door to some micro-measures” to shelter what they argue is a fundamentally strong U.S. economy.

Investors, who recently have been stampeding toward the safest of assets seemed to be expressing a different view, with some pressing the administration to “go macro.”

At the end of last week, top administration economic adviser Lawrence Kudlow said a package could include help for workers forced to stay home – and small businesses or industries such as airlines hard-hit by the virus. Still, he advised “let’s not assume the worst.”

In particular, he dismissed the need for the kind of across-the-board fiscal stimulus that some economists have urged: “We don’t want to willy-nilly throw $300-$400 billion, with a thousand-dollar check to every American.”

Financial markets appear to be clamoring for something very much along those lines, Bloomberg said. While U.S. stocks recouped some losses late Friday, they’re still down more than 10% from last month’s peak. And, investors are worried that not enough is being done to prevent a recession. Michael Feroli, JPMorgan Chase & Co.’s chief U.S. economist, said, “We could be facing a problem of a shortfall of aggregate demand, in which case, just targeted stimulus may not be enough.”

In addition, even as Kudlow was hinting at the possibility of action “soon” the President questioned whether fiscal stimulus was needed and again pounded the Fed for more action. “The Fed should cut and the Fed should stimulate,” he said.

Kudlow said the White House would be able to “move very rapidly” if conditions worsen, and that it could use executive orders, but would not hesitate to go to Congress for more assistance.

Congress so far hasn’t shown much appetite for a big fiscal push to fight the virus, either. Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Ways and Means Chairman Richard Neal, D-Mass., both said this week that it was too soon to talk about tax cuts.

Congress did pass–and the President signed on Friday–an $8 billion emergency spending bill that includes funds to help state and local governments fight the virus and low-cost loans for small firms facing disruptions to their business.

In addition, on Sunday Bloomberg published a slightly sunnier report that acknowledged that “when $7 trillion is erased from stocks in 2 1/2 weeks, it’s safe to say investors are pricing in a lot of economic pain.” However, it concluded that “one thing most of them are not yet bracing for is a recession.”

The view, drawn from a survey published by a Wall Street research firm may sound fanciful, given the spread of the coronavirus and its rising threat to the global economy, the report said. “But it’s not grossly out of line with price action so far in the S&P 500,” which has fallen roughly as much as it did in its last six corrections. None of those episodes portended an economic contraction.

Bloomberg called the sell-off “harrowing” but noted that by almost any measure except velocity it remains a pipsqueak compared with the battering investors took at the end of 2018 when the S&P 500 plunged almost 19% while price-earnings ratios compressed to 16 times annual earnings. They’re a lot higher than that now at 19.3.

“The market’s saying ‘Ok, obviously equity valuations need to be significantly lower than they were before this started,”’ said Arthur Hogan, chief market strategist at National Securities Corp. “But pricing in a recession in the equity markets is probably not what’s happening right now.”

Bloomberg said that the recent investor survey conducted by Evercore ISI found less than half of the respondents are expecting the economy to experience two consecutive quarters of negative growth in 2020. While acknowledging the economic threat from the coronavirus has grown, about two-thirds anticipate the number of infected cases to peak in May.

Of course, not knowing how the outbreak will play out makes predicting its effect on growth impossible. But it’s also worth noting that the U.S. stock market was priced at a historically high multiple when the sell-off began, a fact that complicates the calculus using reactions in equities as a litmus for how bad the virus’s impact will be.

Michael Geraghty, equity strategist at Cornerstone Capital Group, said “The U.S. economy is undoubtedly strong. It would take a lot to swing it into a recession and I don’t think the virus is likely to do that anytime soon.”

“With a lot of unknowns out there, the market will be more volatile and will pull back a bit but it doesn’t necessarily mean a recession,” Frank Ingarra, head trader at Greenwich, Connecticut-based NorthCoast Asset Management LLC, said. “Things could wrap up really quick and we could resume a bull market.”

So, we will see. Clearly the market and the global economy face significant uncertainty and possibly new threats as the outbreak runs its course—developments producers should watch closely as the political season advances, Washington Insider believes.

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