Record Diesel Prices Put A U.S. Export Ban On The Table

Two fuel prices moved in opposite directions on Tuesday. Crude oil fell again on hopes that talks at the United Nations could wind down the war with Iran, while the diesel that moves America's trucks and tractors set another record, and Washington answered by putting an export ban on the table. Underneath that, two Federal Reserve officials spent the day saying last week's interest-rate increase may not be the last.

Fast Facts

• The Nasdaq Composite closed at a record 27,244 on Tuesday, up about 0.5% and its second record close in a row, while the Dow fell 185 points and the S&P 500 finished flat (Read More)
• President Trump said he supports banning exports of U.S. diesel, a reversal for an administration that had resisted fuel-export restrictions (Read More)
• Jefferies cut refiners Valero Energy and Marathon Petroleum to hold from buy as Republican support for an export ban mounted (Read More)
• Banks and money managers dragged the S&P 500's financial sector down roughly 2%, with JPMorgan Chase and Wells Fargo each off close to 4% at one point (Read More)
• Natural gas futures, which are contracts to buy fuel at a set price later, posted their biggest one-day gain in six weeks, settling up 4.5% at $2.965 per million British thermal units (Read More)
• DoorDash agreed to pay $131.5 million to settle a New York City investigation into its compliance with the city's minimum-pay law for delivery workers (Read More)

Global News

• A monthly survey of eurozone businesses rose to 53.1 in September from 52.0 in August, its strongest since April 2023, with any reading above 50 meaning activity is expanding (Read More)
• The Organisation for Economic Co-operation and Development said the world economy has held up better than expected, but warned a long Middle East conflict could take a heavy toll on global activity (Read More)
• Stocks in China and Hong Kong fell on Wednesday as investors cooled on this week's Trump-Xi summit, though property shares rose on state support for developer China Vanke (Read More)
• Singapore's core inflation rate climbed to 2.2% in August, close to a two-year high, and its headline rate to 2.3% (Read More)

Record Diesel Prices Put A U.S. Export Ban On The Table

Diesel set another record last week. The Energy Information Administration's weekly survey put the national average for on-highway diesel at $6.529 a gallon for the week ended September 21, up 24.4 cents in seven days and $2.78 above the same week a year earlier. AAA, which samples daily rather than weekly, had it at $6.5050 as of Sunday, September 20; two numbers circulate for the same thing because the surveys differ. On Tuesday, at the United Nations, President Trump said he now supports banning exports of U.S. diesel: "I've said let's not send out the diesel." A week earlier Interior Secretary Doug Burgum had said the administration would consider a ban only if it would lower prices, "but that's not the case."

The strange part is what crude oil was doing. Brent, the main international oil benchmark, fell about 2.1% on Tuesday to roughly $98 a barrel and West Texas Intermediate about 2.6% to roughly $89, on hopes for a diplomatic end to the war with Iran; Trump said U.S. officials met Iran's delegation for about three hours in New York. So crude got cheaper while the fuel made out of it set a record. Crude comes out of the ground; diesel comes out of a refinery, and the world has only so much refinery capacity. When the bottleneck is refining rather than drilling, extra crude does not help, and the finished fuel can climb while the raw material falls.

The politics moved faster than the policy. Sen. Chuck Grassley of Iowa proposed blocking diesel exports and farm-state Republicans signed on, among them Sen. Dan Sullivan of Alaska: "American fuel should stay home with Americans." Others in the same party disagreed, with Sen. John Cornyn calling a ban "a gimmick." Markets took the threat seriously anyway. Jefferies downgraded Valero Energy and Marathon Petroleum to hold from buy on Tuesday, and by Wednesday morning European diesel prices had jumped on the prospect that American barrels might stop arriving.

What would a ban actually do? The first effect and the second point in opposite directions. Keeping diesel at home adds supply, and more supply usually means lower prices, for a while. But refiners sell much of their output overseas, and if that outlet closes they run out of places to put the fuel and cut production instead, shrinking supply again. Diesel also trades in a world market, so a ban would push the global price up, and the U.S. price is tied to it. Mike Sommers of the American Petroleum Institute said restricting exports would "only compound the problem." That is a trade group defending its members, and also the mainstream view among energy economists. None of this says where diesel prices go next. It says the case for a ban and the case against it rest on the same facts read over different time horizons, which is usually the shape of an argument worth following.

Sources: Axios · Bloomberg · EIA · WSJ markets · WSJ energy · MarketWatch · Yahoo Finance · Rapunzl, Sept. 11

Two Fed Officials Said Last Week's Rate Increase May Not Be The Last

Last Wednesday the Federal Reserve raised its target range for short-term interest rates to 3.75% to 4.00%, its first increase in three years. On Tuesday two regional Fed presidents said, separately, that it may not be enough. Thomas Barkin of the Richmond Fed said U.S. economic conditions "are, if anything, firming," that the supply shocks pushing prices up "aren't proving to be short-lived, or one-off events," and that "the risks to inflation outweigh the risks to maximum employment." Asked whether more increases would be required, he said "We'll see," noting he does not vote on the rate-setting committee this year. Susan Collins of the Boston Fed wrote that she supported last week's move, that she now sees a greater likelihood of inflation staying notably above the Fed's 2% target, and that "a somewhat more restrictive federal funds rate will help ensure that inflation durably returns to target."

The question is no longer whether the Fed raised rates but whether it is finished. Barkin noted that much of the Personal Consumption Expenditures Price Index, the inflation gauge the Fed actually targets, is rising at more than a 3% annual pace against a 2% goal. Two officials pointing past September on the same day moves currencies first, and it did: the dollar climbed to an almost eight-week high against a basket of other currencies, and gold fell. Gold pays no interest, so when investors expect the return on cash and bonds to rise, a metal that pays nothing looks worse by comparison.

The government bond market did not read the day the same way. In Tuesday's session the two-year Treasury par yield, which is what the federal government pays to borrow for two years, closed at 4.71%, down 5 basis points, meaning 5 hundredths of a percentage point. The ten-year finished unchanged at 4.96% and the thirty-year at 5.29%. So on a day two Fed officials talked about doing more, the rate most sensitive to Fed policy went down. It is worth resisting the urge to explain that away. One session of bond trading is noisy, officials who do not vote have less pull than those who do, and the honest summary is that the commentary and the bond market disagreed. The next inflation reading starts to settle it.

Sources: Reuters · CNBC · Economic Times · WSJ · WSJ currencies · WSJ gold · U.S. Treasury · Rapunzl, Sept. 17

A Homebuilder Cut Its Margin Outlook And Said Housing Is Getting Harder

KB Home, one of the largest homebuilders in the United States, reported results for the quarter that ended August 31 after Tuesday's close and cut its guidance for the year. It now expects an annual housing gross profit margin, the share of each sales dollar left after the direct cost of building and land, of 16.0% to 16.2%, down from 16.1% to 16.5%. Management blamed pricing pressure, higher direct and land costs, and a smaller contribution than expected from its higher-margin West Coast communities. The quarter was weaker than a year ago across the board: housing revenues fell 20% to $1.29 billion, deliveries fell 19% to 2,732 homes, net orders fell 12% to 2,604. One number went the other way. Backlog, the homes already sold but not yet handed over, grew for the first time in four years, up 2% to 4,398 homes and 3% to $2.05 billion.

A builder's gross margin is one of the most direct readings on housing demand available, because it shows what builders give up in price cuts and incentives to keep homes moving. It lands against borrowing costs that have not come down: Freddie Mac's weekly survey put the average 30-year fixed mortgage rate at 6.95% for the week ended September 17, up from 6.76% a week earlier and 6.26% a year ago. That is the link to the two stories above. Mortgage rates track long-term government borrowing costs, those costs reflect what lenders expect inflation to do, and inflation expectations are exactly what two Fed officials were arguing about on Tuesday.

Sources: WSJ · Investing.com · Freddie Mac · Rapunzl, Sept. 18

What To Watch

Reporting today: Cintas (CTAS), Paychex (PAYX) and General Mills (GIS) are expected before the open. Analysts' average estimate is $1.35 a share for Cintas, $1.33 for Paychex against $1.22 a year ago, and $0.72 for General Mills against $0.86. H.B. Fuller (FUL) is expected after the close at $1.45.

From the Federal Reserve: Governor Michael Barr is expected to speak this morning on the economic outlook and housing at a Chicago Fed community development summit.

Later this week and next:

• Costco (COST) is expected after Thursday's close, the calendar's largest at roughly $398 billion, with an estimate of $6.48 against $5.87 a year ago
• Darden Restaurants (DRI), TD SYNNEX (SNX) and BlackBerry (BB) are expected before Thursday's open, at $2.06, $4.46 and $0.03
• President Trump is scheduled to host President Xi Jinping this week, with a tariff truce due to expire in November
• The Bureau of Economic Analysis is scheduled to publish GDP and corporate profits on September 30
• Whether the administration acts on a diesel export ban is the open question hanging over refiners and freight costs

The Classroom Takeaway

Today's briefing rests on a fact that surprises most people the first time they meet it: "the oil price" and "the diesel price" are two different numbers, and they can move in opposite directions on the same day. The way to believe it is to look both up and watch them for a week, which our live market data page makes easy.