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Kitco daily macro-economic/business digest - May 4

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(Your update on all the latest news that’s important for the marketplace and may directly impact markets.)

Fed: Hike and Hold, but for How Long?

China data questioned on all fronts, including ag production and stocks

In Today's Digital Newspaper

Abbreviated report today.

Equities: Global stock markets were mixed to weaker overnight. U.S. stock indexes are pointed toward mixed openings when the New York day session begins. The marketplace is now looking forward to Friday's April U.S. jobs report from the Labor Department. The key non-farm payrolls number is forecast to come in at up 180,000 versus a rise of 236,000 in the March report.

Oil prices crashed in Wednesday's session, marking the second day of declines. WTI June contract plunged to $63.64 per barrel while Brent for June settlement was 4.7% lower to $71.80, the lowest level in more than a year. There are also fears that Russian output might not have fallen despite government announcements. There are reports that Russian crude shipments remain strong despite sanctions and embargoes: Reuters reported April oil loadings from Russia's western ports are on track to reach their highest since 2019 at more than 2.4M bbl/day.

WTI oil sank 7.2% in the first few minutes of Asia trading before erasing losses and turning higher.

PacWest, an American bank, is in talks with investors and several potential partners to discuss options, which may include a sale or the raising of fresh capital, after its share price fell by 52% on Wednesday. PacWest has asked Piper Sandler, an investment bank, to help it explore its "strategic options," according to Bloomberg. The decision comes days after First Republic was shut down by American regulators and taken over by JPMorgan Chase.

Bill Ackman warned the whole regional banking system is at risk and that the FDIC's failure to update and expand its insurance regime has "hammered more nails in the coffin." He claimed First Republic wouldn't have failed if the regulator had even temporarily guaranteed deposits. 

A.P. Moller-Maersk, a Danish container-shipping company, said its first-quarter profits sank by more than half as freight rates plunged from their pandemic watermark. The shipping industry boomed in 2020, making six-decades worth of profit in just three years. But demand has slowed as customers shrink their inventories. In response Maersk, until recently the world's biggest shipping company, is focusing investments on higher-return services, such as linking ports to other transport networks.

Fed did not decide on any pause and as expected boosted rates 25bp. The central bank's tenth consecutive rate increase brings its benchmark federal-funds rate to a range between 5% and 5.25%, a 16-year high — highest level since September 2007. The Fed upped rates at its previous nine meetings by a cumulative 4.75 percentage points from near zero in March 2022, the fastest rate-raising cycle in 40 years. The vote to raise rates by a quarter-point was unanimous,

In their policy statement, officials said they would monitor economic and financial-market developments and the effects of their earlier rate increases "in determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time." Of note: The language is similar to how the Fed concluded its rate hikes in 2006.

Futures markets are now showing that traders are pricing in a pause at the June FOMC meeting and then a cut in September, with some suggesting a July cut. But some analysts believe the Fed will hit the pause button for months. But Fed Chair Jerome. Powell said: "Inflation has moderated somewhat since the middle of last year. Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go. Despite elevated inflation, longer-term inflation expectations appear to remain well anchored as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets." But the Fed will need a few more months of data to accomplish and maintain "a sufficiently restrictive stance" in its inflation battle. It will take some time, and in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won't cut rates. "In principle, we won't have to raise rates quite as high," he added.

The worst of the banking turmoil appears to be over, Powell noted. The Fed reiterated that the "banking system is sound and resilient," adding that tighter credit conditions will likely "weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain," the post-FOMC meeting statement reads.

On the issue of a recession, Powell disagreed with Fed economists that the United States will face a mild recession later this year. Powell acknowledged that he feels "this time is really different," noting that there is "so much excess demand. It's interesting, as you know, we've raised rates by 5 percentage points in 14 months, and the unemployment rate is 3.5%, pretty much where it was — even lower than where it was — when we started," he said. "The case of avoiding a recession is, in my view, more likely than that of having a recession," Powell told reporters, adding that he doesn't rule out having a downturn either. "It's possible that we will have what I hope would be a mild recession."

Reaction to the Fed action:

  • "Here we are, deep into this rate hike cycle where they now are backed into a corner, weighing the risk of high inflation versus a banking calamity that we have been going through," Ken Mahoney, the CEO of Mahoney Asset Management, said in a note. "We knew they would raise rates until they broke something, and they certainly have broken the regional banking sector."

  • Wall Street Journal editorial: Fed Chair Powell "was quick to note that the FOMC statement had dropped language from previous meetings that it anticipated further monetary tightening. He also said current "policy is tight," suggesting that real interest rates are already about 2%. He pointed to tightening credit availability for borrowers and the Fed's continuation of quantitative tightening from the runoff of its bond portfolio. Markets seemed to agree on a dovish interpretation as the dollar fell, gold rose, and bond yields declined."

  • Sevens Report: "With the Fed no longer applying pressure to the economy via higher rates, it makes the economic growth (and the influences on economic growth) now the key to whether the S&P 500 sees 4,300 first, or 4,100 first, and it's the economic data that will tell us which way it's breaking, starting with tomorrow's jobs report."

  • Economists projected that a quarter-point increase would cost credit card users an additional $1.7 billion in the next 12 months. Overall, the 500-basis-point spike in the Fed funds rate since March 2022 is expected to cost consumers with credit card debt about $33.4 billion over the next 12 months.

  • "In fact, the 25-basis-point rate hike expected on May 3 has already increased the cost of the average 30-year mortgage by roughly $11,600, given that rate hikes are usually priced into mortgage rates in advance," WalletHub analyst Jill Gonzalez said.

  • The odds of a recession in the U.S. "are pretty darn high," according to Jeffrey Gundlach. The DoubleLine CEO doesn't expect the FOMC to raise interest rates again, and he suspects the S&P 500 will drift lower after being stuck in a trading range and struggling to surpass the 4200-4300 mark.

The three U.S. banks which failed since March have one thing in common, the Financial Times reported — SVB, Signature Bank and First Republic were all audited by KPMG. In all three cases, the auditors gave the banks' financial statements a clean bill of health as recently as February.

Two drones crashed into the Kremlin, according to the Russian government, which blamed Ukraine for the attack. Moscow said an electronic-warfare system downed the unmanned aircraft, which exploded over the grounds in the heart of the capital, injuring no one and causing no major damage. Kyiv denied involvement and suggested President Vladimir Putin's domestic opponents were responsible. Some reports speculate Russia itself was responsible for the incident, which some observers noted could give Putin political cover for further military mobilization.

House Oversight Committee Chair James Comer (R-Ky.) is subpoenaing records from the FBI that he claims could show that then Vice President Joe Biden allegedly received bribes from a foreign national in exchange for policy favors. Comer and Sen. Chuck Grassley (R-Iowa) said in a letter to Attorney General Merrick Garland on Wednesday that the document in question "includes a precise description of how the alleged criminal scheme was employed as well as its purpose." Grassley acknowledged that the whistleblower — who appears to be an FBI employee — approached his office, but he wouldn't provide any more information about the source for this new allegation. The White House has strenuously denied the allegations, saying that the GOP continues to launch probes into Biden based on little or no evidence.

Powell comments on debt-limit issue. Federal Reserve Chairman Jay Powell said if the debt limit is breached, the Fed couldn't "protect the economy from the potential short- and long-term effects of a failure to pay our bills on time." Powell added: "It's essential that the debt ceiling be raised in a timely way, so that the U.S. government can pay all of its bills when they're due. A failure to do that would be unprecedented. We'd be in uncharted territory and the consequences to the U.S. economy would be highly uncertain and could be quite averse."

White House will not use constitution to deal with debt limit issue. Karine Jean-Pierre, the White House press secretary, said the Biden administration is "not going to entertain" invoking the 14th Amendment, which guarantees the full faith and credit of the United States.

White House weighs debt-limit fallback options. Publicly, both Republicans and Democrats are sticking to their demands as the clock ticks on the country's debt limit. GOP lawmakers are seeking to force cuts to federal spending, while Democrats continue to call for a debt-limit increase without any other policy conditions. Privately, though, Biden administration officials and lawmakers have started to weigh potential alternatives, including a short-term increase in the borrowing limit that would buy them time to find a compromise.

Senate Democrats unveiled an initiative on May 3 to boost U.S. economic competition with China and respond to any aggression toward Taiwan. It would include a comprehensive bipartisan bill as a follow-up to last year's China competition legislation, which provided $52 billion to ramp up US semiconductor manufacturing.

China gets a sign that manufacturers are starting to struggle. China's factory activity struggled in April, with the Caixin manufacturing PMI dropping to 49.5, from 50 a month earlier. It suggests the economic recovery after Covid infections peaked has slowed significantly, Caixin's Wang Zhe said. "It remains to be seen if the rebound is sustainable."

Domestic tourism in China rebounded to pre-covid levels during the May Day holiday. Some 274 million trips were made throughout the five-day break, roughly a 70% rise from 2022, according to the government. Spending by domestic tourists in China during the holiday hit 148 billion yuan ($21 billion) — a 128% rise from a year earlier and on par with the amount of cash splurged in 2019.

China is putting the yuan front and center in its fight back against the US dollar's unique influence over global money. A Bloomberg report says the use of the renminbi in contracts for everything from oil to nickel is gathering speed, with the currency's share of global trade finance tripling since the end of 2019.

A growing number of U.S. officials have doubts about data/statistics coming from China. This includes ag-related information about stocks and production in China.

Gold futures surged to a record high on renewed safe-haven demand. Comex gold traded to a record $2,085.40 an ounce after rallying around 4% since Monday's close.

Russia says it will continue to talk with the U.N. and the other parties in the Black Sea Grain Initiative but will not do anything that harms its own interests, Kremlin spokesman Dmitry Peskov told reporters via telephone. "The Russian side will continue contacts with both UN and other representatives, in the hope that the terms of the deal will be fulfilled after all," he stated. "Of course, Russia will not do anything further that will be contrary to its interests." This comes as U.N. Secretary-General Antonio Guterres said that he has been told that Russia is looking at proposals he delivered in letters to Russian President Vladimir Putin, Ukraine President Volodymyr Zelenskyy, and Turkish President Tayyip Erdogan. "I was informed that the Kremlin is looking into the proposal and that there would be a response to my proposal," Guterres told reporters in Africa. He said he was neither optimistic nor pessimistic on the potential outcome.

Biden calls AI leaders to White House. President Biden, racing to upgrade the government's artificial-intelligence (AI) expertise and role, is calling the leading architects of generative AI to Washington today to discuss guardrails for the powerful technology, sources familiar with his plans tell Axios. Biden will push Google, Microsoft and others building generative AI to be sure their products are safe before unleashing them on the public. Vice President Harris will host today's Roosevelt Room meeting with the CEOs of four top AI players — Sam Altman of OpenAI, Dario Amodei of Anthropic, Satya Nadella of Microsoft and Alphabet CEO Sundar Pichai.

President Biden set to nominate Philip Jefferson as Federal Reserve vice-chair. The Fed governor emerges as top choice for position vacated by Lael Brainard earlier this year.

Torres Small hearing set for next Wednesday. The Senate Ag Committee announced a confirmation hearing next Wednesday for Xochitl Torres Small to be deputy ag secretary. Torres Small, a former New Mexico representative who has been serving as USDA's undersecretary for rural development, would succeed Jewel Bronaugh, who left USDA earlier this year.

Ajay Banga approved to lead World Bank. The World Bank's executive board approved Ajay Banga as its next president on Wednesday, putting the India-born American businessman in charge of an effort to expand lending capacity and fight climate change. Banga, 63 years old, is a former chief executive of Mastercard who also held leadership roles at Citigroup and PepsiCo.

The powerful United Auto Workers is holding off on endorsing President Joe Biden's re-election bid, citing concerns over his policies that would encourage a transition to electric vehicles, according to a memo from the union. The UAW has more than 400,000 members, and Biden has touted its support in the past. Last year he called American autoworkers "the most skilled autoworkers in the world." The group's membership is mostly concentrated in Michigan, a presidential battleground state.

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