No respite. For besieged US Treasurys, I mean.
Yields rose across the curve in the earliest of this week’s trading, with 10s hitting 5.23% and twos 4.93%. The catalyst: Oil, of course.
Brent flirted with $109 Monday despite the resumption of exports from the Saudi port of Yanbu, which is receiving crude again following repairs to a key pipeline connecting the Kingdom’s oil heartland to the Red Sea.
Crude’s march higher was a response to news that Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz. Some reporting suggests Trump expects to resume the American bombing campaign after the midterms.
At the same time, the administration’s “very seriously” considering the institution of restrictions on diesel exports, Trump said late Sunday, while watching a golf tournament in Illinois.
“That can lead to a little bit of an increase on gasoline for cars,” Trump mused, in the same off-the-cuff remarks to reporters. “So we’re looking at it. We may do it.”
Unless you’re Chuck Grassley or someone else who needs the farm vote, that’s not music to your ears. Rather, it’s nails on a chalkboard.
Export controls will almost surely backfire, and even if they don’t, whatever temporary relief they might bring about domestically doesn’t justify the risk of exacerbating the global supply shock.
All of that said, it’s unquestionably the case that the inexorable rise in diesel prices constitutes a clear and present danger to the US economy. I dare say most US presidents would be pondering some manner of limited export controls right now, despite knowing the pitfalls.
Diesel prices above $6.50/gallon, “rais[e] the specter of higher prices on everything from food to core-goods, as elevated transportation costs are passed along to the end user,” BMO’s Ian Lyngen said Monday, noting that elevated fuel costs will continue to raise questions about a breaking point for the heretofore resilient domestic spending impulse.
“The assumption that the US consumer (and therefore aggregate economy) can withstand another leg higher in core prices is the essential underpinning of the selloff in Treasurys,” Lyngen added, in the same note. “After all, if investors believed WTI crude near $100/bbl would trigger an economic slowdown of significance, then 10-year yields wouldn’t be at 5.23% this morning.”
This feels unmistakably like the boiling frog apologue, both with respect to the consumer and stocks. Eventually, the de facto consumption tax from the war (not to mention the tariffs) will erode discretionary spending, the same way ever higher yields will by and by undercut equities.
One way to address all of the above is to end the war. I doubt one in 1,000 American voters is more concerned about Iran’s ramshackle, Pinky-and-the-Brain-style nuclear program than they are about fuel and food prices.
Someone (?) is giving Trump very bad advice. Then, when it doesn’t go “as expected”, they are doubling down.
This morning I read that some folks in the industry are calling for a suspension of the diesel excise tax instead of export controls. No mention of whether that would have a similar impact on diesel prices. (The only downside mentioned was that an excise tax holiday would be difficult to implement with the House not in session.) Rational or not, the embargo would make a bigger splash which is something the WH seems to like.
That said, which constituents are the folks in the White House most concerned about? Voters in the farm belt or voters in the oil producing states? Which happens to include Texas where Ken Paxton needs all the help he can get in the upcoming election.