Kitco daily macro-economic/business digest - May 22
Biden and McCarthy to Meet Solo Today for First Time Since Feb. 1
In Today's Digital Newspaper
Federal Reserve Chair Jerome Powell suggested he was open to holding interest rates steady at the central bank's meeting next month, saying that the current banking stress could mean rates may not need to rise as high as otherwise to slow the economy. Officials have indicated that their decision on whether to raise rates again at their June 13-14 policy meeting could be a close call.
Even after consolidation, the U.S. has thousands of banks. The number of commercial lenders fell from 9,613 in 2001 to 5,002 in 2020, according to a recent congressional report. By contrast, Canada has fewer than 100.
People born outside the U.S. made up 18.1% of the overall labor force last year — the highest level in 27 years of records, the Labor Department said in its annual report on foreign-born workers. Details in Markets section.
President Biden said Sunday he expected a thaw in relations with China, a day after he and other Group of Seven leaders took steps to tackle what they see as Beijing's economic intimidation. Biden said at a news conference wrapping up the G7 meeting in Japan that the U.S. wants to open more lines of communication with China. But as noted in today's dispatch, China has made some recent comments and taken action that seem to contradict Biden's more optimistic outlook.
The European Union has slapped Meta with a record $1.3 billion privacy fine and ordered it to stop transferring user data across the Atlantic by October. The fine surpasses the previous record of $806 million against Amazon in 2021 for privacy violations related to its advertising business. Details below.
Credit Suisse staff are gearing up to sue Switzerland's financial regulator over hundreds of millions of dollars worth of bonuses that were canceled after the bank was hastily rescued by rival UBS earlier this year, according to reports, adding to the deal's already sizable legal fallout as the two banks work to finalize the merger. Forbes.
President Biden announces new $375 million military aid package for Ukraine during Zelenskyy meeting at the G7 confab in Japan. Biden said the $375 million aid package would include ammunition, artillery and armored vehicles to bolster Ukraine's efforts to fight back against Russia's invasion. The State Department noted that Sunday's announcement would be the 38th drawdown of equipment for Ukraine from funding authorized by Congress since Russia first invaded Ukraine more than a year ago. Biden at a press conference on Sunday said he has a "flat assurance" from Zelenskyy that Ukraine will not use the fighter jets to cross the Russian border.
There should be no major trade policy implications from BSE confirmed in a cow in South Carolina that was traced back to a herd in Tennessee. USDA said: "We do not expect any trade impacts" because the United States is rated internationally as a negligible risk for the disease, which is always fatal to cattle. Phase 1 of the U.S./China trade agreement also helps protect the U.S. trade position. Details in Trade Policy section.
Remember when Greece was in a very serious debt situation? Greece is now close to seeing its sovereign debt return to investment grade, a dramatic turnaround from its disastrous 2010 default. Details below.
The Office of Management and Budget (OMB) is starting its review of the Environmental Protection Agency's (EPA) final rule on the Renewable Fuel Standard (RFS) levels for 2023 and beyond. The review process includes a series of meetings with various stakeholders. Meanwhile, the EPA's final plan does not include provisions for renewable fuel credits (eRINs) to be awarded to electric vehicle manufacturers using renewable natural gas. Reports suggest that the Biden administration removed these provisions to prevent potential legal challenges that could jeopardize the overall RFS levels. The EPA has until June 14 to finalize the RFS plan. More details in Energy & Climate Change section.
Equities today: Asian and European stock markets were mostly higher overnight. U.S. Dow opened around 15 points lower... flat. In Asia, Japan +0.9%. Hong Kong +1.2%. China +0.4%. India +0.4%. In Europe, at midday, London flat. Paris -0.3%. Frankfurt -0.3%.
U.S. equities Friday: The Dow fell 109.28 points, 0.33%, to end at 33,426.63. The S&P 500 declined 6.07 points, 0.14%, at 4,191.98 and the Nasdaq Composite dropped 30.94 points, 0.24%, at 12,657.90.
All three indexes finished the week in the green, with the S&P and Dow industrials notching their first positive week so far this month. The Nasdaq rose more than 3% for the week.
Market quotes of note:
On tap today:
• Federal Reserve speakers: St. Louis's James Bullard on the economic outlook at 8:30 a.m. ET, Richmond's Thomas Barkin and Atlanta's Raphael Bostic at a Fed conference at 10:50 a.m. ET, and San Francisco's Mary Daly at an economic symposium at 11:05 a.m. ET.
• USDA Weekly Grain Export Inspections report, 11 a.m. ET.
• USDA Crop Progress report, 4 p.m. ET.
• Middle East Petroleum & Gas Conference, Dubai (through May 23). Speakers include OPEC Secretary-General Haitham Al-Ghais; WTI June futures expire; Hart Energy Super DUG Conference, Fort Worth, Texas (through May 24)
• USDA Secretary Vilsack will host a press call announcing "significant investment" to expand access to jobs, health care and infrastructure in Rural Partners Network Communities
The EU fined Meta, which owns Facebook and Instagram, €1.2 billion ($1.3 billion) for failing to comply with its privacy rules and ordered the company to suspend transfers of user data to America. It is the largest fine to be imposed on a big tech company in the bloc. Ireland's Data Protection Commission, one of the EU's privacy watchdogs, said that Facebook did not properly protect the data of European users against American surveillance programs.
The Federal Reserve's rate-raising campaign has hit small businesses the hardest. Smaller companies rely predominantly on lending from banks, and commercial and industrial lending by banks to businesses has fallen every month this year. Nearly half of all U.S. banks said they are raising their standards for lending money to small companies, with 56% of lenders reporting falling demand. Meanwhile the average rate for a loan from the U.S. Small Business Administration, which historically costs less than a bank loan, has reached double-digits, driving many small firms to borrow less.
Immigrants' share of the U.S. labor force grows to a new high. Foreign-born workers' share of the U.S. labor force rose last year to the highest level in 27 years of records, as labor demand surged and the pandemic faded. People born outside the U.S. made up 18.1% of the overall labor force, up from 17.4% the prior year and the highest level in data back to 1996, the Labor Department said. The number of immigrants in the labor force — those working or actively looking for jobs —r ose by 1.8 million to 29.8 million in 2022. More foreign-born people joined the labor force than native-born Americans last year, the Wall Street Journal notes.
Sluggish U.S. population growth and accelerating baby-boomer retirements during the pandemic created labor shortages in many industries, increasing job opportunities for foreign-born workers. The Labor Department's report doesn't break down foreign-born workers by country of origin or legal status. The figures include legally admitted immigrants, refugees, temporary residents and immigrants lacking permanent legal status.
Auto dealers finally have cars to sell again. New-car buyers are finding a bigger selection of models to choose from this spring selling season, in large part because of easing supply-chain woes and more stable factory output. The replenished inventory also is shaping up to be an important test for car companies: If supplies get bloated, it could put an end to the lofty prices and big profits the industry has enjoyed since the pandemic's early days, the WSJ concludes.
• Outside markets: The U.S. dollar index was weaker, with the euro, yen and British pound all firmer against the greenback. The yield on the 10-year U.S. Treasury note was higher, trading around 3.69%, with a mixed tone in global government bond yields. Crude oil has swung to gains, with U.S. crude around $71.80 per barrel and Brent around $75.85 per barrel. Gold and silver were weaker in electronic trading, with gold around $1,974 per troy ounce and silver around $23.90 per troy ounce.
• At around $3.50 a gallon, average national gas prices are $1 less than they were a year ago. A similar drop has happened only three times recently—during the 2009 recession, the 2015 OPEC supply glut, and after the onset of Covid-19 in 2020, according to GasBuddy's Patrick De Haan.
Gas prices have fluctuated between about $3.15 and $3.65 a gallon this year. That's well below $5 a gallon or more last year, but people have not increased their driving much, wrote Tom Kloza, the global head of energy analysis at the Oil Price Information Service, in an email to Barron's.
Gasoline demand fell 4.2%, to 8.9 million barrels a day in the latest week, according to the Energy Information Administration. OPIS estimates that prices could be down $1.25 to $1.50 a gallon by June from last year.
The positions of oil traders such as hedge funds are near the most bearish levels they have seen since 2011, Bloomberg reported. So far this year, WTI crude futures are down 11%, while Brent crude, the international benchmark, is down 12%.
• Oilprice.com asks whether it's time to take green methanol seriously as governments and industries try to reduce carbon emissions. It notes:
— Methanol has a wide range of uses including creating plastics, paints, and construction materials as well as being used as a fuel for transport.
— Methanol production traditionally uses natural gas, but as the world races to reduce emissions there is a growing opportunity for green methanol.
— Arguably the biggest growth opportunity for green methanol is as a new fuel for the shipping industry, an industry that is already looking to aggressively decarbonize.
• Hydro reservoirs around Europe are recovering, but that's thanks to water conversation efforts rather than higher inflows, according to BloombergNEF. Reservoirs in Italy, Switzerland, Austria and France are filling up at an average 357 gigawatt-hours per week, 10% higher than the nadir of 2022 but still the second-lowest filling rate since 2017. Unless water inflows pick up, electricity generation from hydro will remain muted in the region, leading to more gas being burned in the power sector — and higher prices.
• China's disappointing economic recovery is putting the metals bears in charge. Merchants, bankers, brokers and fund managers attending the London Metal Exchange's annual Asian event reported lackluster activity, and they don't expect that to change soon, Bloomberg reports.
• The price of extra virgin olive oil has surged to an all-time high, with a 46% increase from last year, resulting in a price of $6,269.63 per metric ton as of April. This cost translates to about $6 per liter for consumers, although additional shipping, marketing, and sales costs will significantly raise the final price. Filippo Berio, a leading olive oil brand, reports that the latest olive season was the most challenging in 30 years due to record-low crop yields. This price spike is largely due to severe drought in Spain, the producer of about 40% of the world's olive oil. The country experienced its hottest and driest summer on record last year, leading to a significant drop in production. Spain's Ministry of Agriculture, Fisheries and Food forecasts that the crop will yield just 680,000 tons of olive oil in the current growing season, a significant decrease from the five-year average annual yield of 1.37 million tons. Both Spain and Italy, another major producer, had lighter harvests than expected. Spain has requested emergency funds from the European Union to support its farmers. Researchers warn that due to climate change, it may become more difficult to grow olives in key production areas, which could lead to more volatility in prices and higher costs for consumers. A significant shift in farming practices may be needed to counter this problem.
• Rice is in trouble as the Earth heats up, forcing the world to find new ways to grow one of the most important crops, the New York Times reports.
• More Polish wheat headed to United States. Another shipment of about 30,000 MT of European Union origin wheat, believed to be from Poland, is expected to be shipped to the U.S. in June or July. This follows two previous shipments of Polish wheat to the U.S. — one of about 31,000 MT shipped in April and another of about 32,000 MT shipped in January both to Tampa, Florida.
• Ag trade: Taiwan tendered to buy up to 65,000 MT of corn that can be sourced from the U.S., Brazil, Argentina or South Africa and 56,000 MT of U.S. milling wheat. South Korea tendered to buy 135,000 MT of milling wheat that can be sourced from the U.S., Canada or Australia.
• U.N. agency: 2 million killed, $4.3 trillion in damages from extreme weather over past half-century. More than 2 million people have died over the past half-century around the world as a result of nearly 12,000 extreme weather, climate and water-related events, which have also caused $4.3 trillion of economic damage, according to the World Meteorological Organization. The United States took most of the economic damage, around $1.7 trillion, between 1970 and 2021, while 9 in 10 deaths occurred in developing countries. AP.
— President Joe Biden announced the U.S. would support training Ukrainian pilots to use American-made F-16 fighter jets, a significant step after resisting the idea of providing the planes to Ukraine.
— To aid Ukraine, allies are looking to a security model like Israel's. An Israeli-style security agreement for Ukraine would give priority to arms transfers and advanced technology, Polish President Andrzej Duda said in an interview with the Wall Street Journal. This security agreement would be linked to a process of moving toward future membership in NATO for Ukraine but stop short of actually making NATO a party to any conflict with Russia, according to Western officials familiar with the talks. With NATO membership for Kyiv possibly years away, a set of binding security arrangements would be a way of helping the Ukrainian military immediately as it gears up for an expected counteroffensive against Russia's invasion.
— G7 calls for full implementation of Black Sea grain deal. The Group of Seven (G7) called on all participants of the Black Sea Grain deal "to continue and fully implement its smooth operation at its maximum potential and for as long as necessary." G7's statement on global food security also stressed "the importance of allowing grains to continue to reach those most in need."
— Russia targets 55 MMT of grain exports annually. Russia plans to harvest on average around 130 MMT of grain a year and export up to 55 MMT, Russian First Deputy Agriculture Minister Oksana Lut said. She noted Russia had managed to increase its grain exports despite some countries rejecting its supplies because of the war in Ukraine. Russia is currently shipping around 80% of its grain to the Middle East and North Africa, with Turkey, Egypt, Iran, Saudi Arabia and Algeria comprising the top five buyers, according to Eduard Zernin, the head of Russia's grain exporters union.
— Ukraine's Zaporizhia nuclear power plant, the largest in Europe, was cut off from its power supply and is relying on diesel generators. The United Nations called the safety situation "extremely vulnerable."
Meanwhile, Russia launched several strikes on the Ukrainian city of Dnipro. Ukraine's air force claimed to have shot down 20 drones and four missiles. Russia has intensified its aerial attacks in recent weeks in anticipation of a Ukrainian counter-offensive.
— The war in Ukraine has forced farmers to risk planting crops in fields potentially littered with explosives left by Russian forces, the Associated Press reports. As a result of the Russian invasion and ongoing occupation, Ukrainian farmers face a difficult decision of risking their lives to plant and harvest crops during the critical spring planting season. This danger is compounded by soaring production and transportation costs caused by Russia's blockade of many Black Sea ports. Some European countries have also imposed import restrictions on Ukrainian grain to prevent a surplus.
Impacts: Industry insiders, Ukrainian government officials, and international organizations predict at least a 20% to 30% reduction in grain output, lower quality crops, and potentially thousands of bankruptcies next year. This could pose a significant threat to global food security as Ukraine is often referred to as the "breadbasket of the world," providing essential supplies of wheat, barley, and sunflower oil to regions like Africa, the Middle East, and parts of Asia. The U.N. Food and Agriculture Organization has reported that 90% of agricultural businesses in Ukraine have lost revenue and 12% have land contaminated with mines. These conditions may lead to a further reduction in land planted with grain, with significant consequences for local farmers and the global food supply.
— Latest on debt-limit talks:
— Debt-ceiling standoff could start a recession, but default would be worse. Prolonged debt-ceiling squabbling could push the U.S. economy into recession, while a government default on its obligations might touch off a severe financial crisis. A Wall Street Journal article looks at three potential scenarios — ranging from a last-minute deal to lengthy impasse—and the potential fallout for the economy.
— After Xi. The Wall Street Journal's China correspondent, Chun Han Wong, author of the forthcoming book, Party of One: The Rise of Xi Jinping and China's Superpower Future, discusses the political situation in China. As the nation's most powerful leader since Mao Zedong nears his 70th birthday, Xi Jinping's succession plans remain unclear. This uncertainty keeps the Chinese Communist Party's elite members vigilant and aids Xi in retaining his power. However, the article notes, this lack of a clear succession plan could backfire if it continues indefinitely, potentially alienating his supporters and aggravating his adversaries to such an extent that it might destabilize his leadership or even lead to a coup d'état.
— President Biden said he expects U.S. relations with China to improve soon as a spat over an alleged spy balloon earlier this year shows signs of blowing over. Speaking to reporters on Sunday at the end of the G7 summit in Japan, he said "I think you're gonna see that begin to thaw very shortly." But the two superpowers also still disagree on a lot.
Details: The U.S. reached an agreement with Chinese President Xi Jinping to maintain open lines of communication with the country, but the spy craft incident earlier this year derailed the effort, President Biden said. Biden claimed that China's balloon had temporarily stalled chances for open dialogue between Washington and Beijing. The president did say he maintains hopes to reopen those talks soon. Biden said: "We should have an open line [of communications]. With the Bali conference that's what President Xi and I agreed that we were going to do and meet on. And then this silly balloon that was carrying two free cars worth of spy equipment was flying over the United States, and it got shut down and changed in terms of talking to one another."
— China bars purchases of Micron chips, announcing that that Micron products failed to pass a cybersecurity review. Beijing warned operators of key infrastructure against buying the company's goods, saying it found "relatively serious" risks in Micron products sold in the country. The tech sector has become a key battlefield over national security between the two countries. The U.S. semiconductor maker said it cooperated with the probe and stands by its products' safety. Washington has blacklisted Chinese tech firms.
Mainland China and Hong Kong generated 25% of Micron's $30.8 billion in 2022 revenue. China is investing in its own chip industry to reduce reliance on foreign manufacturers. The agency's statement said it "promotes high-level opening up" to the outside world. Micron CEO Sanjay Mehrotra attended the weekend's Group of Seven summit in Japan, the Financial Times reported. Micron said it was evaluating the agency's conclusion and assessing its next steps. Shares of Micron were down over 6% in premarket trading.
Other impacts: With the ban, Chinese companies can easily switch out its products for those made by competitors such as Samsung and SK Hynix, according to analysts and Western business executives who have consulted with Chinese authorities.
China also is accelerating efforts to develop satellite-powered internet networks to compete with Elon Musk's Starlink, which has maintained connections in war-torn Ukraine. New launch sites are being built in China, and state-owned and private satellite companies are expanding, the Wall Street Journal reported.
— G7 leaders said they will seek "constructive and stable" ties with Beijing, even as they push ahead with steps to reduce dependence on China for critical supply chains. They also said they will implement an anti-economic-coercion mechanism, drawing a Chinese rebuke.
— The Mexican government is requesting Texas to discontinue its state-run cargo truck inspections at the border due to long delays and significant trade losses. Texas Department of Public Safety (DPS) initiated these inspections on May 2 at the Veterans International Bridge in Brownsville and Free Trade International Bridge in Los Indios, causing delays from 8 to 27 hours. This has had a significant impact on perishable products and has been costly to American consumers.
Perspective: In 2022, the U.S. imported $18.7 billion of produce, including fresh, frozen, and processed fruits, vegetables, and nuts from Mexico, according to USDA.
Background: Texas DPS's checkpoints are supplementary to the commercial truck inspections performed by U.S. Customs and Border Protection (CBP). The DPS inspections have significantly slowed down CBP's processing. The Texas DPS stated the inspections' goal was to ensure road safety by checking that trucks are functioning properly. After initially inspecting all trailers from Mexico, DPS reduced the number of inspections from May 8.
Possible USMCA complaint. Despite the reduction, the Mexican government has threatened to lodge a complaint under the United States-Mexico-Canada (USMCA) trade agreement if inspections are not halted immediately. The Mexican economy ministry argues these actions stem from an "anti-Mexican vision," despite Mexico being Texas's main trading partner with an average annual trade value of $231 billion.
— There should be no major trade policy implications from BSE confirmed in a cow in South Carolina that was traced back to a herd in Tennessee. The U.S. has a negligible risk status for BSE and an atypical case will not alter that status and no major trade disruptions are expected. This is the seventh case of BSE found in the U.S. and the first since 2012. As for China, Phase 1 of the U.S./China agreement says: "Provided the United States maintains its OIE negligible risk classification for that disease, China shall not impose new import restrictions or requirements related to that disease on imports of U.S. beef."
ENERGY & CLIMATE CHANGE
— Biden administration pulls back on renewable natural gas credits. The Biden administration has dropped, for now, a plan that would have awarded automakers such as Tesla credits for using renewable natural gas to power electric vehicles.
— RFS update. The Office of Management and Budget (OMB) is starting its review of the Environmental Protection Agency's (EPA) final rule on the Renewable Fuel Standard (RFS) levels for 2023 and beyond. The review process includes a series of meetings with various stakeholders, starting with the National Oilseed Processors Association (NOPA) on May 23, followed by NATSO (representing truck stop operators) on May 31, Clean Fuels Alliance of America and the American Fuel and Petrochemical Manufacturers on June 1, and the United Steel Workers on June 6.
The EPA's final plan does not include provisions for renewable fuel credits (eRINs) to be awarded to electric vehicle manufacturers using renewable natural gas. Reports suggest that the Biden administration removed these provisions to prevent potential legal challenges that could jeopardize the overall RFS levels.
The EPA has until June 14 to finalize the RFS plan. As the OMB review process continues, additional meetings are expected to be scheduled. The focus remains on any changes in the final RFS levels compared to the proposed plan, particularly in terms of biodiesel and renewable diesel.
— The U.S. Department of Energy (DOE) announced the allocation of $187 million to promote electric vehicles (EVs). This includes $87 million distributed across 45 projects, spanning 18 states, aimed at accelerating the electrification of domestic transportation, advancing more sustainable EV technologies, and raising consumer awareness about the benefits and potential cost savings of EV ownership.
DOE also introduced a new funding opportunity worth $99.5 million. This initiative is intended to support projects that improve EV charging infrastructure in underserved communities, develop EV batteries that use abundant materials, and further educate consumers about EVs and charging.
Applications for this new funding opportunity are currently open. Interested parties must submit concept papers by June 26, with full applications due by Aug. 11. This initiative is part of the DOE's efforts through its Vehicle Technologies Office (VTO) to support the growth of the EV sector.
— Ford Motor Co. signed onto three deals for a supply of lithium amid a ramp-up of electric vehicle production, with an aim of producing 2 million units by the end of 2026. The agreements include a long-term deal with Canada's Nemaska Lithium Inc. for 13,000 tons of lithium hydroxide a year, a deal with EnergySource Minerals for supply from a California site anticipated to start up in 2025 and a five-year agreement with Albemarle Corp. for more than 100,000 metric tons of supply. Reuters.
— Exxon joins hunt for lithium in bet on EV boom. The Texas oil giant recently purchased drilling rights to some 120,000 gross acres of Arkansas land from which it aims to produce the mineral, a key ingredient in batteries for electric cars, cellphones and laptops, according to people familiar with the matter cited by the Wall Street Journal.
POLITICS & ELECTIONS
— Biden gets low ratings on economy, guns, immigration in AP-NORC poll. Just 33% of American adults say they approve of President Joe Biden's handling of the economy and only 24% say national economic conditions are in good shape. That's according to a new poll from the Associated Press-NORC Center for Public Affairs Research. Public approval of Biden's handling of the economy remains low in a time of high inflation, a difficult housing market and concerns about a potential U.S. government debt default. American opinion is also gloomy about Biden's efforts on gun policy and immigration, with only 31% saying they approve of the president's performance on those hot button issues. Overall, 40% say they approve of the way Biden is doing his job.
— Election results in Greece trigger a big rally in stocks and bonds. Prime Minister Kyriakos Mitsotakis of Greece is on the cusp of a new four-year term after his party did far better than opinion polls had predicted. In the run-up to the election, hedge funds had been shorting Greek bonds, betting on more political instability. Of note: Greece is close to seeing its sovereign debt return to investment grade, a dramatic turnaround from its disastrous 2010 default. New York Times.
CONGRESS— Recent bank failures and the San Francisco Fed will come under scrutiny from the House Oversight Committee on Wednesday. Witnesses have yet to be announced. The hearing follows several last week where lawmakers in both chambers questioned failed bank CEOs and regulators about recent bank failures. Fed Governor Michelle Bowman is repeating calls for a third-party probe into the failure of Silicon Valley Bank and pushed back against calls for increased regulation on smaller lenders in response to the recent banking strains. Treasury Secretary Janet Yellen told CEOs of large banks more bank mergers may be necessary.