Kitco daily macro-economic/business digest - June 1

Despite Errant Media Hype, House Overwhelming Clears Debt-limit Measure

In Today’s Digital Newspaper

Some Federal Reserve officials are signaling they plan to keep interest rates steady in June while retaining the option to hike further in coming months. Skipping an increase would give policymakers time to assess data but not preclude future tightening, Governor Philip Jefferson said Wednesday. The message was echoed by Philadelphia Fed President Patrick Harker, who also urged a June pause. After Jefferson’s remarks, traders scaled back the odds of a rate hike at the June 13-14 Federal Open Market Committee meeting to about 35%, from nearly 60% a day earlier.

Eurozone inflation falls more than expected to 6.1%, the lowest level since Russia invaded Ukraine more than a year ago, bolstering hopes that monetary policymakers could stop raising interest rates this summer.

Defense Secretary Lloyd Austin warned that incidents with the Chinese military could "spiral out of control” after a fighter jet carried out an "aggressive” maneuver near a U.S. military plane. More in China section.

Exxon Mobil and Chevron shareholders struck down a raft of proposals urging the companies to cut greenhouse-gas emissions derived from fuel consumption, put out new reports on climate benchmarks and disclose certain oil-spill risks, among other initiatives.

Drones struck two oil refineries in southern Russia on Wednesday as Western officials said Moscow was moving to shore up defenses in border areas and along the 900-mile front with Ukraine ahead of a planned counteroffensive by Kyiv. More in Russia & Ukraine section.

The Ukrainian Ministry of Renovation and Infrastructure announced on Thursday that the Black Sea Grain Initiative has again been obstructed by Russia, which has blocked the registration of ships to all Ukrainian ports. This follows similar allegations made against Russia a month ago. More details in Russia & Ukraine section.

NASA held its first public meeting on its study of UFOs. A team has investigated more than 800 sightings of mysterious objects in the skies, it said yesterday. Of those, between 2 and 5% can’t be explained. The panel said it needed better information to understand these objects. But there’s no evidence — so far — that the UFOs are linked to alien life.

MARKET FOCUS

Equities today: Asian and European stock markets were mostly higher overnight after the House debt-limit vote and Fed officials hinting at a pause in hikes. Treasuries dropped, largely reversing a rally in the previous session. U.S. Dow opened around 60 points lower. In Asia, Japan +0.8%. Hong Kong -0.1%. China flat. India -0.3%. In Europe, at midday, London +0.5%. Paris +0.8%. Frankfurt +1.1%.

U.S. equities yesterday: The Dow closed down 134.51 points, 0.41%, at 32.908.27. The Nasdaq fell 82.14 points, 0.83%, at 12,935.29. The S&P 500 lost 25.69 points, 0.61%, at 4,179.83.

The Dow lost ground during May, falling by around 3.5% while the Nasdaq gained 5.8% and the S&P 500 edged up 0.3%.

Bank deposits saw a record decline of 2.5% in the first quarter of 2023. The Federal Deposit Insurance Corp. said in a report that deposit outflows at U.S. banks totaled $472 billion in the quarter, the largest drop recorded since the agency began collecting such data in 1984.

Market quotes of note:

• "Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.” — Fed governor Philip Jefferson
• Climate proposals stumble badly at oil giant meetings. Investors in Chevron and Exxon Mobil yesterday overwhelmingly rejected an array of shareholder proposals meant to force the oil producers to cut greenhouse-gas emissions and disclose more climate-related data. Big investors have been playing down support for ESG, the investment movement that focuses on environmental, social and corporate governance issues, amid pressure from conservative lawmakers across the United States. Activists fumed about the results, which capped a sharp reversal in their movement’s fortunes since the hedge fund Engine No. 1 won three seats on Exxon’s board in 2021. "It’s incomprehensible that most investors still accept the U.S. supermajors’ refusal to cut emissions this decade,” Mark van Baal, the founder of the environmental advocacy group Follow This, said after the meetings.
• "The quicker we can get away from the Chinese components the safer we’ll all be.” — Richard Walsh, CEO of ventilator company CorVent Medical
• Ross Perot Jr., whose family is one of the largest independent property developers in the U.S., warned of a looming real-estate recession if banks don’t start lending again. "If the industry can’t get a construction loan, real estate will have a recession,” Perot said.

On tap today:

• ADP's employment report is expected to show that the U.S. private sector added 180,000 jobs in May. (8:15 a.m. ET) UPDATE: Private businesses in the U.S. created 278,000 jobs in May of 2023, compared to a downwardly revised 291,000 in April and well above forecasts of 170,000. The services sector added 168,000, led by leisure and hospitality (208,000) and trade/transportation/utilities (32,000) while job losses were seen in financial activities (-35,000); education/health (-29,000); information (-15,000); and professional/business (-5,000). Meanwhile, the goods-producing industry added 110,000 jobs due to mining (94,000) and construction (64,000) while manufacturing lost 48,000 jobs. On the wage front, pay increases slowed for both job changers (12.1% vs 13.1%) and job stayers (6.5% vs 6.7%). "Pay growth is slowing substantially, and wage-driven inflation may be less of a concern for the economy despite robust hiring", said Nela Richardson, chief economist, ADP.

• U.S. jobless claims are expected to rise to 235,000 in the week ended May 27 from 229,000 one week earlier. (8:30 a.m. ET) UPDATE: The number of Americans filing for unemployment benefits rose by 2,000 from the previous week to 232,000 in the week ending May 27, the most in one month, but below market forecasts of 235,000. The figure also remained well below the elevated levels of March, in line with other recent data pointing to a stubbornly tight labor market in the U.S. economy.

• U.S. labor productivity in the first quarter is expected to fall at a revised 2.5% annual pace from the prior quarter. (8:30 a.m. ET) UPDATE: Nonfarm business sector labor productivity declined by 2.1% in the first quarter of 2023, which was lower than the preliminary estimate of a 2.7% fall and better than market expectations of a 2.5% drop. Output grew 0.5 %, surpassing the preliminary estimate of 0.2%, while hours worked were up 2.6%, slightly lower than the preliminary estimate of 3.0%. On a yearly basis, productivity decreased 0.8% in the first three months of 2023, reflecting a 1.4% increase in output and a 2.2% rise in hours worked. Analysts note that productivity has been experiencing a contraction for five consecutive quarters on a year-on-year basis, which marks the longest period of contraction since the series began in the first quarter of 1948.

• S&P Global's U.S. manufacturing index for May is expected to hold at 48.5, unchanged from a preliminary reading. (9:45 a.m. ET)

• Institute for Supply Management manufacturing index is expected to tick down to 47.0 in May from 47.1 one month earlier. (10 a.m. ET)

• U.S. construction spending for April is expected to rise 0.1% from the prior month. (10 a.m. ET)

• Federal Reserve Bank of Philadelphia President Patrick Harker speaks on monetary policy at 1 p.m. ET.

The consumer price inflation rate in the Eurozone fell to 6.1% in May 2023, down from 7.0% in the previous month and below market expectations of 6.3%, a preliminary estimate showed. The rate hit its lowest level since February 2022, though it remained significantly higher than the European Central Bank's target of 2.0%. The decrease in inflation was primarily driven by a 1.7% decline in energy prices, following a 2.4% increase in April. Additionally, there was a slowdown in cost pressures for food, alcohol, and tobacco (12.5% vs 13.5%), non-energy industrial goods (5.8% vs 6.2%), and services (5.0% vs 5.2%). The core inflation rate, which excludes energy, food, alcohol, and tobacco, also eased more than anticipated, reaching 5.3%.

Fed Governor Philip Jefferson signaled the FOMC is inclined to pause this month, but this "should not be interpreted to mean that we have reached the peak rate.” He wants to see more data before deciding how much more hiking is needed. Patrick Harker also endorsed foregoing an increase at the next meeting, June 13-14.

After Jefferson’s remarks, traders scaled back the odds of a rate hike at the June FOMC meeting to about 35%, from nearly 60% a day earlier.

The latest Beige Book report from the Federal Reserve, issued ahead of the Federal Open Market Committee (FOMC) meeting set for June 13-14, continues to reflect concerns about a potential recession in the U.S. economy, and inflation remains a major point of focus. The report, prepared by the Chicago Fed and based on information collected up to May 23, contains several references to the slowing pace of inflation, but also mentions that inflationary pressures are still too high.

Consumer activity has generally been robust in recent weeks, but the report notes a rise in loan and credit card defaults and delinquencies, although these levels are approaching, but not yet exceeding, pre-pandemic levels. As expected with the Fed's recent interest rate hikes, demand for credit is falling.

Despite these challenges, the U.S. economy continues to mostly advance, though at a slowing pace. Two of the 12 Fed districts reported slight to moderate declines and six reported no change. The report underscores that inflationary pressures continue to be a primary concern for Fed officials.

Fed focus. Federal Reserve Chair Jerome Powell and several of his colleagues have been keeping a close eye on a narrow measure of inflation that focuses on service industries excluding housing. Why? And should they bother? "Policymakers are paying particular attention to nonhousing services inflation, which is considered most closely linked to wages. Analysis shows that higher labor costs are passed along to customers in the form of higher nonhousing services prices, however the effect on overall inflation is very small. Labor-cost growth has no meaningful effect on goods or housing services inflation. Overall, labor-cost growth is responsible for only about 0.1 percentage point of recent core PCE inflation," the San Francisco Fed's Adam Hale Shapiro writes in a new paper (link).

Market perspectives:

• Outside markets: The U.S. dollar index was slightly, with the euro also weaker against the greenback. The yield on the 10-year U.S. Treasury note was firmer, around 3.65%, while there was a mixed tone in global government bond yields. Crude oil moved to being nearly unchanged ahead of U.S. gov’t inventory data due this morning, delayed a day by the Monday U.S. holiday. U.S. crude was around $68.30 per barrel while Brent was around $72.65 per barrel. Gold and silver futures were weaker, with gold around $1,981 per troy ounce and silver around $23.53 per troy ounce.

• European coal exports surged after a buying spree turned into a glut as concern over energy shortages eased. Some 1.12 million tons have been shipped out of the region from Spain, the Netherlands and other ports this year. Smaller shipments have been sent on routes that would have been improbable in recent years. Bloomberg.

• Overseas sales of U.S. oil and refined products have surged. Exports of crude have jumped twelve-fold since December 2015, when Washington nixed crude-export restrictions.

• The London Metal Exchange has lost its benchmark status in a key part of the nickel market since last year’s short squeeze, according to Eramet SA. CEO Christel Bories said an index produced by Shanghai Metals Market is now the standard for pricing ferronickel. 

RUSSIA/UKRAINE

— The conflict in Ukraine has escalated further with an increase in shelling and drone strikes within Russia's borders, including Moscow. Ukraine has, however, denied any involvement in the drone attacks on the Russian capital. Despite this, Ukrainian presidential adviser Mykhailo Podolyak suggested that Russia was experiencing its own tactics after months of bombarding Ukrainian cities. While he claimed pleasure in anticipating more attacks, he denied Ukraine's direct involvement.

John Kirby, a member of the U.S. National Security Council, revealed uncertainty about who coordinated the recent drone intrusions during an interview with CNN. He further stated that the Biden administration has clearly communicated to Ukraine, both privately and publicly, that it does not support attacks on Russian soil. This recent escalation demonstrates a potential shift in the conflict dynamics, increasing tension in the ongoing war.

— Ukraine’s grain, oilseed production and exports to fall sharply. Ukraine’s combined grain and oilseed crop production is expected to fall 5.8 MMT (7.9%) to 68 MMT this year, Ukrainian grain traders union UGA forecasts. The grain harvest could include 17.9 MMT of wheat and 23.3 MMT of corn, which would be down from 20.2 MMT and 27.3 MMT, respectively, in 2022. Oilseed production is expected to rise. UGA said combined exports of grains and oilseeds could total 43.9 MMT in 2023-24, which would be down 12.5 MMT (22.2%) from this year. Exports could include 15 MMT of wheat and 19 MMT of corn.

— The Ukrainian Ministry of Renovation and Infrastructure announced on Thursday that the Black Sea Grain Initiative has again been obstructed by Russia, which has blocked the registration of ships to all Ukrainian ports. This follows similar allegations made against Russia a month ago.

Ukrainian President Volodymyr Zelenskyy appealed to the European Union (EU) to remove all export restrictions on Ukrainian agricultural products. The request was made during a meeting with European Commission President Ursula von der Leyen in Moldova. During the meeting, Zelenskyy also discussed security guarantees for Ukraine, which is currently not a NATO member.

Russia comments. Alexander Bortnikov, director of Russia’s Federal Security Service (FSB), claimed that the grain transport corridors in the Black Sea are being used to launch attacks on the Russian coast, according to a report by TASS news agency, cited by Reuters.

The United Nations has suggested that Ukraine, Russia, and Turkey commence work on the transit of Russian ammonia via a pipeline through Ukraine, Reuters reported. This proposal is alongside ongoing discussions aimed at expanding the Black Sea Grain Initiative. These reports of negotiations follow disruptions and highlight ongoing efforts to find common ground and sustainable solutions in the region. The U.N. spokesperson, Stephane Dujarric, confirmed that these discussions were ongoing in a recent briefing. He noted that these talks were part of the U.N. Secretary-General's initiative to enhance the effectiveness of the Joint Coordination Centre and tackle the issue of ammonia export, as per the signed agreement. However, Dujarric refrained from providing further details at the moment.

POLICY UPDATE

— The House easily passed a bipartisan debt-limit bill, 314-117, with 149 Republicans (67% of House Republicans) and 163 Democrats voting for the measure. The final tally was considerably above the level reflected in many major media ahead of the vote — another indication how some in the media focus on those opposing things rather than in this case the vast majority who support things.

Voting against the bill: Members of the House Freedom Caucus and 71 Republicans in total, and 46 Democrats. A trio of chairs voted against the bill. Rep. Mike Bost (R-Ill.), the chair of the House Veterans’ Affairs Committee, and Rep. Mike Guest (R-Miss.), the chair of the Ethics Committee, voted no. As did Rep. Gary Palmer (R-Ala.), the chair of the Republican Policy Committee.

The vote was a victory for House Speaker Kevin McCarthy (R-Calif.), who brokered a deal with President Joe Biden to extend the debt limit until Jan. 1, 2025, while also cutting government spending and implementing two years of spending caps. The package also implements new work requirements for some social programs, rescinds some new IRS funding, claws back nearly $30 billion in Covid-19 relief funds and expedites approval for the controversial Mountain Valley Pipeline.

Domestic discretionary spending authority in the deal will be $112 billion below the Congressional Budget Office baseline for fiscal 2024 and $136 billion below the baseline for fiscal 2025. Republicans also get better leverage to avoid being jammed with another giant omnibus spending bill this year.

The Fiscal Responsibility Act now goes to the Senate. Senate Majority Leader Chuck Schumer (D-N.Y.) will file cloture on the motion to proceed. That would set up a critical procedural vote on Saturday, although the proceedings can move much faster if all 100 senators agree, which they will not. Senators opposed to the legislation plan to offer several amendments — all amendments are expected to be considered at a 60-vote threshold for passage. But Schumer and Senate Minority Leader Mitch McConnell (R-Ky.) haven’t worked out a deal yet on how many amendments they will bring up for a vote or which ones will be in the mix.

Outlook: The Senate will eventually clear the measure and send it to the White House for signature. The timeline as noted depends on a few usual senators who use such events to stall the process.

PERSONNEL

— Harvey Pitt, who became the SEC’s youngest general counsel and later returned as chair died on Tuesday at the age of 78. Pitt was appointed by President George W. Bush in 2001, ran the agency in the turbulent period after the Sept. 11 attacks and implemented new regulations passed in the wake of the Enron accounting scandal.

— New York Fed names Bloomberg alum as chief risk officer. The Federal Reserve Bank of New York has appointed Mihaela Nistor as its chief risk officer and head of its risk group. Nistor most recently served as global head of enterprise risk management for financial news and information provider Bloomberg. Nistor previously was chief risk officer for HSBC Americas Private Banking.

CHINA UPDATE

— The Caixin China General Manufacturing PMI unexpectedly rose to 50.9 in May 2023 from 49.5 in April. Output rose the most in 11 months, new order growth was at 2 year-high, and foreign sales continued to increase. Meantime, buying activity expanded the least in 4 months; while employment fell at the steepest pace since February 2020, with backlogs down for the first time in 5 months. Delivery times got even shorter as suppliers kept sufficient stocks.

On the cost side, input prices fell for the second month on the back of better supply chains and lower prices of metals, food, and fuel.

Selling prices dropped solidly, due to intense market competition.

Sentiment slipped to a 7-month low, on concerns over lingering uncertainty, particularly from overseas. "Current economic growth lacks internal drive and market entities lack sufficient confidence," highlighting the importance of restoring demand," said Dr. Wang Zhe, an economist at Caixin Insight Group.

Of note: Bloomberg Economics said the data may be misleading as they’re based on a relatively small sample size with a tendency to over-correct for seasonal factors. And exports are expected to weaken in the coming months, adding to downward pressure on manufacturers.

— U.S. Secretary of State Antony Blinken has criticized China for its apparent refusal to engage in discussions with senior Pentagon leaders following an incident described as "unnecessarily aggressive.” This incident involved a close encounter between military aircraft over the South China Sea last week. A video released by the U.S. military shows a Chinese J-16 Shenyang fighter jet passing in close proximity to an American RC-135 surveillance plane, causing turbulence for the latter's crew.

Blinken expressed concerns over this "dangerous" event and highlighted the importance of maintaining open lines of communication between the defense ministers of the two countries. This comes after a report that China had declined a meeting request from U.S. Defense Secretary Lloyd Austin at a security summit in Singapore.

China has criticized the U.S. for its portrayal of the incident, with the Foreign Ministry accusing the U.S. of endangering China's national security by conducting regular close-up reconnaissance using ships and planes.

Tensions between the U.S. and China have been high over various issues, including disputes over Taiwan and China's regional ambitions. These tensions were further heightened by the discovery of a Chinese surveillance airship over the U.S. earlier this year, which was perceived as part of a large-scale surveillance program run by the Chinese military. The Chinese government, however, claimed it was a weather balloon that had been blown off course.

Blinken expressed his hope to reschedule his visit to Beijing, emphasizing the importance of managing the U.S./China relationship responsibly. He suggested that cooperation should be sought where possible for the benefit of both countries and the global community, but at the very least, there needs to be certain guardrails in place to manage the relationship.

— There has been a 26.2% decrease in the number of U.S. companies applying to export sensitive technologies to China between 2021 and 2022, according to Thea Rozman Kendler, assistant secretary of commerce for export administration at the Commerce Department’s Bureau of Industry and Security. This significant drop is likely due to the increased scrutiny by the U.S. gov’t over exports, especially those that could potentially be used for military purposes.

Reasons why. Kendler indicated in her comments to the Senate Banking, Housing and Urban Affairs Committee that the decline could be a result of companies' reluctance to submit license applications for transactions they believe are likely to be rejected. This is due to the increased scrutiny the Commerce Department is putting on know-your-customer checks and its advice on export red flags.

The U.S. has recently tightened restrictions on exports of advanced technology to China, including imposing new restrictions on advanced semiconductors and chip-making equipment in October. Kendler said these restrictions are being applied with "scalpel-like" precision to hinder China's military modernization efforts.

ENERGY & CLIMATE CHANGE

— Renewable energy capacity is predicted to grow by a third in 2023, largely driven by a significant push into solar and wind power by China, according to a forecast by the International Energy Agency (IEA). The IEA expects renewable capacity to increase by 107GW, reaching 440GW, which equals the total installed power capacity of Germany and Spain combined. This expected growth is attributed to governmental support, concerns about energy security, and increased competitiveness of renewables against fossil fuels, outweighing rising interest rates, investment costs, and supply chain challenges.

China, set to account for 55% of global annual capacity additions in 2024, is anticipated to further strengthen its position as a renewable energy leader. The country is promoting large-scale solar projects and smaller-scale installations for public institutions and state-owned businesses. It's also likely to drive a nearly 70% global rebound in wind power capacity in 2023 after deploying less than expected in 2022 due to Covid-19 restrictions.

In the U.S. and Europe, supply chain issues have caused a delay in wind projects planned for 2022 until 2023. Solar electricity panels, however, are projected to account for two-thirds of the total increase in renewable capacity for 2023. Manufacturing capacity for these panels is expected to more than double to 1,000GW by 2024, led by China, the U.S., India, and Europe. Based on current trends, the world will have sufficient solar manufacturing capacity to meet the IEA’s net-zero greenhouse gas emissions scenario by 2050.

— U.S. Department of Energy (DOE) announced an investment of $46 million to promote the design and R&D of fusion power plants. This funding will be distributed to eight companies through the DOE's Milestone-Based Fusion Development Program, aligning with President Joe Biden's aim to establish a pilot-scale demonstration of fusion power within the next decade.

The funding, spread across the fiscal years 2022 and 2023, will cover an 18-month period, although the projects may last up to five years. Any additional investment beyond the first 18 months will depend on Congressional appropriations and the satisfactory achievement of pre-established project milestones.

— Exxon and Chevron shareholders rejected a series of climate change-related proposals put forward by investors, signifying a setback for climate activists. These results follow a trend of similar climate propositions failing to win majority shareholder support at the annual meetings of UK energy majors BP and Shell. The rejection of these measures is seen as an indication that some shareholders are retreating from advocating for oil companies to adopt specific climate targets. It appears that concerns related to environmental, social, and corporate governance (ESG) issues have been overshadowed by the soaring oil and natural gas prices caused by Russia's invasion of Ukraine.

POLITICS & ELECTIONS

— Former Vice President Mike Pence will launch his 2024 presidential campaign on June 7 with an announcement video and a speech in Iowa. It will be an uphill climb for Pence, who has been polling in single digits, while Trump and Florida Gov. Ron DeSantis, who jumped into the race last week, continue to lead the field.

By

Jim Wyckoff

For Kitco News

Follow @jimwyckoff

jwyckoff@kitco.com

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