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Kitco daily macro-economic/business digest - May 9

Kitco News

Don't Expect Much from Today's Debt Limit/Budget Confab at White House

Fed chair poll | Biofuels | Immigration bill | China cancels more U.S. corn | AIM | Black Sea grain

In Today's Digital Newspaper

Private exporters reported the cancellation of sales of 272,000 metric tons of corn for delivery to China during the 2022-2023 marketing year.

U.S. banks tightened lending standards in the first few months this year and expect to continue over the rest of 2023, said a Federal Reserve survey released on Monday. The report, closely watched on Wall Street, comes as the financial sector contends with deposit outflow worries on the back of turmoil after the high-profile collapse of Silicon Valley Bank and Signature Bank in March. The report warned that banks' concerns about slower growth could lead them to make fewer loans, accelerating an economic downturn, and highlighted commercial real estate as an area of heightened risk that will draw more scrutiny from bank examiners.

Canada expelled a Chinese diplomat for intimidating a lawmaker. Zhao Wei, an official working in the Chinese embassy in Toronto, reportedly tried to obtain personal information about Michael Chong and his family. The MP has been a vocal critic of China's treatment of its Uyghur Muslim population. Mélanie Joly, Canada's foreign minister, declared Zhao "persona non grata." China retaliated by expelling a Canadian diplomat from Shanghai.

Chinese merchandise trade data for April revealed a -7.9% drop in imports vs. (E) -0.2% which has poured some cold water on hopes for a strong recovery in the world's second largest economy. Meanwhile, China imported a lot few soybeans than expected. More in China section.

Chinese authorities raid another consulting firm's offices. Capvision Partners joined the Mintz Group and Bain & Company in having its employees questioned or detained, amid what Beijing says is an effort to stop the theft of sensitive corporate information. That crackdown is further undercutting foreign companies' willingness to do business in China, according to experts. The focus includes some companies reporting on China's ag sector.

President Biden isn't the only one with low poll numbers. A Gallop poll shows public confidence in Jerome Powell's leadership of the Federal Reserve is falling fast.

Former VP Al Gore has advice for livestock producers: feed them seaweed, which reduces the amount of methane they emit. More in Energy & Climate from Monday's AIM confab. USDA Secretary used the invited to announce several initiatives.

All sides to meet on Black Sea grain deal this week. We have details and reports on the declining market impact of the topic in the Russia/Ukraine section.

Payments under the Emergency Relief Program (ERP) Phase 2 continue to increase, rising to $414,533 as of May 6, paid out to 215 recipients, an increase of just over $120,000 compared with the prior week.

The Department of Transportation has proposed a new rule requiring airlines to compensate passengers when a flight disruption is within the airline's control, such as a mechanical or computer-system issue. In Canada, for example, large airlines must pay $400 CAD ($300 U.S.) to passengers who arrive between three and six hours late, and it rises to $1,000 CAD ($750 U.S.) for delays of nine or more hours.

Indonesia reports ASF outbreak on islands near Singapore. More in Livestock section.


Equities today: Global stock markets were mixed overnight. U.S. stock indexes are pointed toward slightly lower openings. In Asia, Japan +1%. Hong Kong -2.1%. China -1.1%. India flat. In Europe, at midday, London -0.4%. Paris -0.8%. Frankfurt -0.2%.

U.S. equities yesterday: All three major indices fell into negative territory early in the trading day and only the S&P 500 and Nasdaq managed to end higher for the session. The Dow ended down 55.69 points, 0.17%, at 33,618.69. The Nasdaq rose 21.50 points, 0.18%, at 12,256.92. The S&P 500 edged up 1.87 points, 0.05%, at 4,138.12.

Nasdaq has officially exited a bear market as investors continue to pile back into tech stocks that have been shunned for much of the past year. Elsewhere, the S&P 500 is up 16% since its last lows seen in October 2022, while the Dow is up 17% since this past September. Only another 3%-4% move will see the two indices restore their bull market status.

Stocks and bonds moved in lockstep for much of 2022, but that relationship has flipped this year. The two asset classes now display the largest negative correlation since August 2020.

Market quotes of note:

  • Goldman Sachs and Barclays are advising clients that the Federal Reserve will be less aggressive in cutting interest rates this year than markets are predicting. Strategists at the banks expect an "on-hold Fed" given the rate decision pattern so far, with their observations arguing "against the extent of easing currently priced for this year."

  • A major concern is commercial real estate loans held by small banks, particularly in offices with low occupancy rates. "It's no secret there are a lot of office loans coming due in 2023 and 2024," said Bain Rumohr, Senior Director at Fitch Ratings covering banks and nonbanks.

  • "I am certainly getting vibes … in the market and in the business context that a credit crunch or, at least, a credit squeeze, is beginning." — Chicago Fed President Austan Goolsbee, in an interview with Yahoo Finance.

  • The European Central Bank may need to raise interest rates for longer than currently anticipated, and September could be the earliest moment when policymakers can judge whether past rate hikes have been effective, ECB policymaker Peter Kazimir said.

  • "This quarter was definitely a tough one… I've never seen this highly unusual situation where beef, pork and chicken were all experiencing challenges at the same time." — Donnie King, Tyson Foods' chief executive officer, told analysts Monday as the largest U.S. meat supplier swung to a loss in its latest quarter and cut its sales forecast for the year. Tyson stock tumbled 16% after the biggest U.S. beef and poultry producer reported earnings below expectations and revised down the rest of the year's projections. The stock sell-off has sliced $427 million off the family's fortune. Chairman John H. Tyson and his family are now worth $2.4 billion.

On tap today:

• Federal Reserve speakers: Governor Philip Jefferson to the Atlanta Black Chambers at 8:30 a.m. ET, and New York's John Williams to the Economic Club of New York at 12 p.m. ET.

• President Biden hosts House Speaker Kevin McCarthy (R-Calif.) and other congressional leaders at the White House to discuss raising the debt limit. 4 p.m. ET.

The Fed warned that banks' concerns about slower growth may lead them to make fewer loans, accelerating a downturn. Its financial stability report highlighted commercial real estate as an area that will draw more scrutiny from bank examiners. A separate Fed survey said U.S. banks reported tighter lending standards and weaker loan demand in the first quarter.

"The bigger concern is that a majority of banks plan to tighten standards further over the rest of the year. That will starve firms and households of credit and help push the economy into recession in the second half of this year," said Michael Pearce, lead economist at Oxford Economics.

A separate Fed financial stability report, also out Monday, highlighted risks: "A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity."

Public confidence in Jerome Powell's leadership of the Federal Reserve is falling fast, according to a Gallop poll released Tuesday which showed 36% of U.S. adults are confident that the Fed chair will do the right thing for the economy. That's down from 37% when Janet Yellen was in her first year of leading the Fed in 2014, and the lowest since the survey began in 2001.

The federal budget deficit was $928 billion in the first seven months of fiscal year 2023, the Congressional Budget Office (CBO) estimates — $568 billion more than the shortfall recorded during the same period last year. Revenues were 10% lower and outlays were 8% higher from October through April than they were during the same period in fiscal year 2022.

April tax collections were particularly weak, resulting in a one-month surplus of only $173 billion this year (or $99 billion adjusted for the effects of timing shifts), compared to $308 billion ($373 billion adjusted for timing shifts) in April of 2022. When comparing both surpluses for timing shifts, this year's April surplus is just one-quarter of the April 2022 surplus.

As a share of the economy, deficits have totaled roughly 7.5% of Gross Domestic Product (GDP) over the past year — twice the rolling deficit from June of 2022 and more than 50% higher than just before the pandemic.

New York Times article explains a major issue re: mortgage fees. New York Times writer Tara Siegel Bernard wrote an article (link) discussing a topic that flared recently regarding mortgage fees. Here is a digest of the article:

Mortgage fees have sparked outrage on TikTok due to a misunderstanding of the changes in fees applied to federal mortgages. The misconception is that borrowers with low credit scores will pay less at the expense of borrowers with good credit. The reality is that the most creditworthy borrowers with large down payments will still pay much less. The Federal Housing Finance Agency (FHFA), the regulator that oversees Fannie Mae and Freddie Mac, had to issue a statement to clear up the confusion. The changes made the rounds on cable television, even landing a spot on Tucker Carlson's final show on Fox News, where he claimed that they were going to provide incentives for bad behavior.

The fees, which were recalibrated in January 2023, have been in place since 2008 to help shore up the finances of Fannie Mae and Freddie Mac after the financial crisis. They are now used to pay for the guarantees these companies provide. Under the new pricing structure, mortgage borrowers with higher credit scores and down payments of about 15% to just under 20% saw fees increase the most, while those with lower scores and down payments had the most significant declines.

The bottom line, the article says, is that borrowers in stronger financial positions will still pay much less in fees compared to those with lower scores and down payments. The pricing also considers other factors, such as the requirement for those with down payments of less than 20% to buy private mortgage insurance, which reduces some of the risk of borrower default for Fannie and Freddie. The changes aim to make homeownership more accessible, particularly for lower and moderate-income individuals.

International travel demand is outpacing domestic demand and driving fares to their highest levels in five years. Average round-trip airfares are up 24%, from 2019 to $1,032. Airfares to Asia are up more than 60%, to $1,619, according to online travel site Hopper.

Meanwhile, the Biden administration intends to propose a new rule that would require airlines to compensate passengers when flight plans change drastically due to causes within the carriers' control, President Biden said Monday.

Market perspectives:

• Outside markets: The U.S. dollar index was firmer, with the euro, yen and British pound slightly weaker against the greenback. The yield on the 10-year U.S. Treasury note was weaker, around 3.49%, with a mostly higher tone in global government bond yields. Crude oil futures were lower, with U.S. crude around $72.30 per barrel and Brent around $76.20 per barrel. Gold was higher ahead of US economic data, trading around $2,038 per troy ounce, while silver was weaker around $25.76 per troy ounce.

• India proving to be a major competitor for China. Western companies are desperately looking for a backup to China as the world's factory floor, a strategy widely termed "China plus one." India is making a concerted push to be the plus one, the WSJ reports. Only India has a labor force and an internal market comparable in size to China's. Western governments see democratic India as a natural partner, and the Indian government has pushed to make the business environment more friendly than in the past.

• Norfolk Southern faces a key test of investor sentiment this week as executives meet with shareholders for the first time since a toxic train derailment in Ohio. The company's annual investor meeting comes as Norfolk Southern has lost about $10 billion in market value since the Feb. 3 accident, while some investors are signaling their discontent with management. The Wall Street Journal reports that New York state Comptroller Thomas P. DiNapoli, who oversees the state's pension system, said the retirement fund will vote against all 13 of Norfolk Southern's board nominees. Another retirement fund is suing the railroad, charging it made misleading statements about the safety of its operations. The freight railroad has said the price tag for the cleanup and related costs could approach $400 million. The costs could reach executives, with the New York fund saying it is voting against approving executive compensation.

Meanwhile, BNSF Railway's first-quarter earnings fell 8.8% as consumer products volume declined 16.4%.

• What's the impact of the recent bank crisis on interest rates? Note this survey from Bloomberg:

• Ag trade: Japan is seeking 125,974 MT of milling wheat in its weekly tender. Taiwan tendered to buy up to 65,000 MT of corn that can be sourced from the U.S., Brazil, Argentina or South Africa. Algeria passed on a tender to buy up to 140,000 MT of corn and 70,000 MT of soymeal.


— Ag ministers should not give farmers marketing advice. When global grain prices started falling last year after a spike in the first months of the war in Ukraine, Poland's then agriculture minister urged farmers to hang onto their harvests in the hope of a rebound and better returns. But Reuters reports the bet backfired badly for some. Grain producers in eastern Europe have been hard hit as a jump in exports from Brazil and Russia helped to drive global grain prices lower while the EU opened its borders to tariff-free Ukrainian grain imports in a show of solidarity after Russia blocked the country's Black Sea ports.

— No ships were inspected Sunday or Monday under the Black Sea Grain Initiative, according to the U.N., adding shipments under the deal had reached 30 million metric tons (MMT) of grains and foodstuffs, including nearly 600,000 metric tons of grain that was shipped via World Food Program vessels to Afghanistan, Ethiopia, Kenya, Somalia and Yemen. The Joint Coordination Center (JCC) was established in Istanbul to implement the deal. The U.S. said that they and Turkey were "working closely with all sides with the aim to facilitate movements and inspections of inbound and outbound vessels ... while discussions for the future of the Initiative continue."

There are 62 vessels waiting to travel to ports in Ukraine, and the U.N. said that eight had been put forward for JCC authorization, but the JCC has not agreed to any new authorizations in recent days.

Regarding inspections of already authorized ships, the U.N. said 26 have been loaded with more than 1.1 MMT and are waiting in Turkish waters, with 14 in Ukrainian ports being loaded with 600,000 metric tons of grain and foodstuffs while three more ships (one inbound and two outbound) were in transit.

The U.N. also said there had been no exports of fertilizer under the Black Sea deal. Russian urea exports increased 10% in 2022 versus 2021. Higher Russian volumes to India and Turkey mirror moves in the oil and diesel markets. What's surprising is that Russia also sold more urea to the U.S., the Netherlands, France and Germany. "Another of the myths is that European and Western entities turned their back on Russian [fertilizer]. That did not happen," said Mike Nash, senior editor of fertilizer markets at Argus. "There are no sanctions on Russian [fertilizer] products. It is in theory free to move everywhere — and it has. "For all the concerns in the mainstream media about the loss of supply of Russian fertilizer, it simply did not happen." As with grains, the proof of availability is in the prices. They're falling. "The story for pretty much all the products in the finished fertilizer market is weak prices [that] are expected to edge down," he said. "The market has adapted. New trade flows have emerged. There is plenty [of fertilizer] around the world."

Market impact: According to Jade Delafraye, Argus' global editorial manager for agriculture, "The situation in Ukraine has had a large impact on the grains, oilseeds and veg-oil markets over the last year or so. But at the moment, the share of Ukraine in the supply of those markets has been greatly reduced. And these markets are well supplied. "Therefore, the concerns and uncertainties about whether Ukraine will be able to continue exporting are not currently sufficient to lift prices."

— War with Russia has siphoned off workers from Ukraine's farms, leaving farmers with inexperienced replacements and concerns about a drop in yields. Reuters.

— The U.S. is set to announce a $1.2 billion aid package for Ukraine as early as today, according to reports. The additional aid will include drones, artillery ammunition and air defense missiles, an official said, as Ukraine prepares for its counteroffensive against Russian forces. With the new package announcement, the U.S. will have committed $37.6 billion in military aid to Ukraine since the beginning of the Biden administration.

— Russian President Vladimir Putin led a pared-down Victory Day parade in Moscow today, an annual exhibition of patriotism marking the Soviet Union's role in defeating Nazi Germany in World War II. Putin's parade aimed to demonstrate the country's military prowess — but it was seemingly toned down due to insufficient military weapons available for display. Also, there were safety concerns after an alleged drone attack on the Kremlin last week.


— China expels Canadian diplomat in retaliatory move as tensions deepen. Beijing's move comes after Ottawa's expulsion of a Chinese diplomat for allegedly targeting a Canadian lawmaker. An official named Jennifer Lalonde, who works at the consulate general of Canada in Shanghai, has been listed as an "unwelcome person" and asked to leave China before May 13.

— China's export growth slowed in April while imports plummeted more than expected, raising more questions about the strength of the economic recovery. Overseas shipments expanded 8.5% from a year earlier to $295 billion — faster than consensus but slower versus March's 14.8% gain. Imports dropped 7.9%, more than anticipated. Crude oil imports were down 1.45% year over year to the lowest level since January, after surging 22.5% in March. Purchases also fell for copper (-12.5%), soybeans (-9.8%) and iron ore (-5.1%). In contrast, imports of natural gas jumped 11%. Imports from the U.S. dropped by 3.1%, while those from the ASEAN countries and the EU were down by 6.3% and 0.1%, respectively.

— China's April soy imports far less than expected. China imported 7.26 MMT of soybeans during April, up 0.6% from March but down 9.8% from last year and well shy of the 9 MMT traders expected, as new customs procedures delayed the unloading of cargoes. Through the first four months of this year, China imported 30.29 MMT of soybeans, up 6.8% from the same period last year.

— China launched a nationwide anti-spy crackdown on consulting firms, according to state media, as Beijing moves to tighten foreign access to sensitive information amid growing tensions with the U.S. On orders from China's central government, authorities carried out synchronized operations in cities including the financial powerhouses of Beijing, Shanghai, Shenzhen and Suzhou, a provincial TV channel in Jiangsu province reported Monday night.

Of note: The crackdown includes firms providing ag-related information about China.

— China halted operations at 32 coal production locations in Inner Mongolia after a deadly accident in February triggered nationwide safety checks. The closed sites had a combined annual capacity of 50 million tons.


— Investors shy away from biofuels stocks, but that could change. Biofuel stocks have struggled recently due to a downturn in the industry, with some stocks declining more than 20% in the past year. This has raised questions about the sector's future. However, a Barron's article says analysts now see buying opportunities, with companies like Darling Ingredients and Opal Fuels receiving positive attention.

The industry's problems stem from the upheaval in the carbon credits market, primarily caused by California's Low Carbon Fuel Standard. The value of credits has fallen by 63% since 2020 due to oversupply, affecting investment in the biofuels industry. Moreover, the EPA's latest clean fuel volume mandates are lower than expected, causing credit prices to slip.

The future of the biofuels industry hinges on state and federal credit values, as well as which fuels are prioritized. Major companies such as BP and Chevron have invested significantly in the industry, but the sector's growth has stalled. To combat climate change, the International Energy Agency suggests that biofuel production must quadruple by 2030, making up 15% of global transportation fuel.

While the industry faces challenges, there are reasons for optimism, the article notes. New state programs, tighter standards in California, and emerging markets like sustainable aviation fuel could help support the industry. Analysts like Matthew Blair believe that the biofuels sector is undergoing a necessary reckoning and may bounce back with the involvement of larger players like BP and Shell.

Investments in biofuel companies currently depend on a combination of supportive political policies and technological advancements. If these factors align, the stocks could see a significant upswing, the item concludes.

— GOP wants gov't watchdog to audit Biden's SPR withdrawals. Top Republicans want a government watchdog to investigate the Biden administration's management of the nation's emergency oil reserves, arguing no credible plan exists to refill it and that it now stands at a 40-year low. In a letter Monday to the Government Accountability Office (GAO), GOP lawmakers demanded a wide-ranging audit that would examine whether the Biden administration's historic release of oil from the cache following Russia's invasion of Ukraine damaged the subterranean storage system. They also want details on a now-paused plan to modernize the Strategic Petroleum Reserve (SPR).

GOP comments: "Mismanagement of the SPR has undermined America's energy security, leaving the nation more vulnerable to energy supply disruptions, and increasing the ability for OPEC and Russia to use energy as a geopolitical weapon," wrote House Energy and Commerce Chair Cathy McMorris Rodgers (R-Wash.), and Sen. John Barrasso (Wyo.), the top Republican on the Senate Energy committee.

Energy Secretary Jennifer Granholm has said the department plans to refill the reserve to pre-war levels when prices are "advantageous to the taxpayer."

Food focus for COP28 via AIM summit. USDA Secretary Tom Vilsack met with representatives from about 40 countries to discuss farm-focused climate solutions at the AIM for Climate Summit on Monday. The ministerial was hosted by Vilsack and Mariam bint Mohammed Saeed Hareb Almheiri, the climate and environment minister for the United Arab Emirates, which will host COP28 this year.

Vilsack and Almheiri told the group of ministers that food should be central to the climate change conference's discussions. "Much is said about how agriculture contributes to greenhouse gas emissions," Vilsack said before the ministerial. "We believe that agriculture also holds tremendous promise in offering solutions to mitigate the impacts of climate change, while strengthening economic viability for farmers, ranchers, and landowners who really are on the frontlines facing this challenge."

Vilsack announced two new U.S. initiatives and interviewed former Vice President Al Gore, a leading advocate for addressing climate change. Gore, known for the book and film An Inconvenient Truth, talked about his 400-acre farm in Tennessee, noting he began about 10 years ago transforming the farm into regenerative agriculture, including crop rotation, rotational grazing, seaweed supplements to reduce livestock's methane emissions and no-till cultivation. Gore said planting more trees is a good idea but the best way to preserve carbon in the soil is in farming. Soil carbon sequestration through regenerative agriculture is the single best way to take carbon out of the atmosphere, Gore said. He said if farmers are going to remove carbon from the atmosphere they ought to be compensated, but first ways must be found to accurately measure that carbon that is put back in the soil. His own farm is working on developing accurate measurement.

While agricultural innovations can play a role in addressing climate change, Gore said the only real solution is to stop emissions from oil and gas. "The climate crisis is really a fossil fuel crisis," he said. "Job number one is to reduce the production and use of fossil fuels."

Gore's advice to the livestock industry: feed the animals seaweed, which reduces the amount of methane they emit.

Of note: Vilsack announced the launch of a new Efficient Fertilizer Coalition and Consortium, which will fund research aimed at giving farmers better data about the performance of novel fertilizers that increase efficiency and reduce direct emissions of nitrous oxide and other greenhouse gases. He also rolled out USDA's latest Science and Research Strategy, detailing the department's science priorities for 2023 through 2026.

— Glencore Plc is joining with Li-Cycle Holdings Corp. to build Europe's biggest battery recycling plant, a key link in the supply chain for metals at the heart of the green-energy transition. The new facility in Sardinia could be commissioned by late 2026.  Bloomberg.

— Tax incentives are helping to fuel Exxon Mobil Corp.'s investments in low-carbon technologies, according to the Financial Times.

— No automaker in North America currently refines its own lithium, but Tesla wants to change that by breaking ground on a $375 million refining facility in Corpus Christi, Texas. The move will help the EV pioneer ease its supply chain and meet ambitious EV sales targets, as it expands outside its core focus of car manufacturing and into raw materials. Elon Musk, who previously likened lithium refining to "printing money," expects the new Tesla plant to produce enough battery-grade lithium to build 1 million electric vehicles by 2025. "Texas wants to be able to be self-reliant, not dependent upon any foreign hostile nation for what we need," Texas Governor Greg Abbott added at the ceremony. "We need lithium."

Meanwhile, the Biden administration is hoping to expedite the review and approval of a $1.7 billion underground mine and processing plant for zinc and manganese in Arizona, making the South32 Hermosa mine the "first-ever" critical minerals mining project accepted under an Obama-era program called FAST-41, which aims to move the project through a prioritized regulatory process, according to E&E News.

— NextEra Energy, the most valuable U.S. power company, is making a huge bet on hydrogen, the WSJ reports. The clean-energy powerhouse says it sees the potential to invest more than $20 billion in so-called green hydrogen, banking on a new law that provides significant tax credits for such projects and an increasing push to cut carbon emissions. The new strategy is a huge bet for the company — but the WSJ item says it's also a familiar playbook: NextEra grew from a regional utility by capitalizing on tax credits that spurred the build-out of wind and solar farms. This time around, the company played a crucial role lobbying lawmakers to define the size of new hydrogen tax credits, the item says, citing people familiar with the matter. It is pushing the federal government to adopt its preferred criteria for what types of hydrogen should be eligible to receive tax credits.


— Indonesia reports ASF outbreak on islands near Singapore. Indonesia reported an outbreak of African Swine Fever (ASF) on a farm on the Riau Islands located near Singapore, according to the World Organization for Animal Health (WOAH). The outbreak was detected April 1 and confirmed April 28, killing 35,297 pigs on a farm with a herd of 285,034. Indonesian authorities indicated the source of the outbreak is still not known and was initially discovered the Singapore Food Agency in pigs imported from Indonesia.

— Lab-grown 'slush'? Italy's ag minister says lab-grown food is potentially dangerous for human health, calling it "slush" that could never taste like natural meat or fish.


Democrats on the Senate Judiciary Committee sent a letter to GOP megadonor Harlan Crow asking him to provide a full accounting of gifts he's given Supreme Court Justice Clarence Thomas and his family, further escalating Democrats' inquiry into Thomas' relationship with Crow — though Senate Republicans are blocking them from passing any legislation in response.


— One of Greenland's largest glaciers is melting far faster than expected. The Petermann Glacier is thinning by as much as 250 feet a year in some places, a new study found.

— A "broken" FAA is two-and-half years behind in approving drone and jet operators to fly. A prime contributor to the delay is the spike in the number of people, including individual farmers, applying to use agricultural drones. The FAA also sees more applicants looking to hire private planes for charter service. Forbes.

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