Articles in Category: Macroeconomics

This morning in metals, we’re tracking the following stories.

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  • Global aluminum value chain under fire from China. The OECD has released a report titled “Measuring distortions in international markets: the aluminum value chain,” in which the organization places particular emphasis on unfairly subsidized aluminum in China, according to a release by the Aluminum Association. “Looking across the whole value chain … shows subsidies upstream to confer significant support to downstream activities, such as the production of semi-fabricated products of aluminum,” the report’s opening reads. “Total government support for [17 aluminum firms] reached up to USD $70 billion over the 2013-17 period, depending on how financial support (i.e. concessional loans) is estimated,” the report continued. “Although all 17 firms received some form of support, it is highly concentrated: the top 5 recipients receive 85% of all support, most of it at the smelting stage of the value chain.”
  • Nucor Corp. breaking ground in the Midwest. Reuters reports that Nucor is planning to build a plate mill for $1.35 billion in Sedalia, Missouri, to be fully operational in 2022. The new mill would produce 1.2 million tons a year of plate products and create about 400 full-time jobs, according to the company’s release. “Tax reform, continued improvements to our regulatory approach and strong trade enforcement are giving businesses like ours the confidence to make long-term capital investments here in the United States,” Reuters quoted Chief Executive Officer John Ferriola as saying in a statement.

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  • Small business owners’ confidence in economy, outlook on business conditions weakens yet again. The Wall Street Journal reports (paywall) that the National Federation of Independent Business’ optimism index has fallen for the fourth straight month. “Over the past few months, owners’ expectations for the future have tempered, while reporting continued solid economic activity,” the NFIB said in its report, based on responses from 621 small-business owners, according to the WSJ. “The Index remains at historically high levels but can’t be expected to improve every month.” As the WSJ article noted, “the survey results mirror those from the Conference Board, whose December survey suggested growing economic-growth concerns.”

The dollar has been on a tear this year, boosted by a large corporate tax cut, a hawkish Fed and the imposition of import tariffs, the Financial Times suggests.

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These policy interventions were specifically designed to help Republicans in November’s midterm election, but they are unlikely to have a lasting positive effect.

Election-motivated fiscal giveaways typically increase macroeconomic instability, while tariffs reduce rather than enhance productivity. Neither will sustain the 2018 dollar recovery in the medium term, the news source believes, nor will the effects of quantitative easing (QE) continue to support mature markets (now that the policies are being withdrawn on both sides of the Atlantic).

According to the Financial Times, since late 2010 the dollar has rallied 35% in broad terms and 50% against emerging-market currencies, while the total return to U.S. stocks is 430% and German bonds have made more than 80%.

These gains have come as both a direct and indirect result of massive QE in the U.S. and Europe, funds have flowed out of emerging markets into those that are direct beneficiaries of QE. As QE is reversed, so too will the flow of funds; QE-supported markets will suffer and, relatively speaking, emerging markets will again become more attractive, the Financial Times believes.

The issue for commodities is what impact this will have on the dollar.

Dollar strength has been one factor depressing commodity prices this year. If the dollar were to weaken relative to a wider basket of currencies, this could have an inflationary effect on prices.

How quickly dollar strength ebbs remains to be seen.

The most recent hike in Fed funds was deemed by many to be a step too far — or at least too fast. At least, the White House that would have preferred a more cautious Fed approach.

The Fed’s position is that we could see two more rate hikes in 2019, a move that would support dollar strength (providing GDP growth remained positive), but recent assessments this week suggest there may be no further rate hikes next year, paving the way for a weaker dollar sooner rather than later in 2019.

Of course, dollar strength is only one of several dynamics impacting the price of commodities, but it remains a consistently strong correlator over time. Other factors include GDP and stock market growth in emerging markets, to the extent that an end to QE boosts investment interest in emerging markets that too could be supportive of commodity prices.

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For now, prices appear under pressure, but what 2019 holds for us — once the current sell-off runs its course — remains the be seen.

This morning in metals, here are a couple news items that piqued our interest:

  • China giving the U.S. a break in trade “war” by lifting the tariff on cars… According to a story originally reported by Bloomberg today, China will lift the 25% retaliatory duty on cars for three months (thanks, China!) in an effort to defuse trade tensions with the U.S. The tariff “will be scrapped starting Jan. 1, China’s finance ministry said Friday, ” according to the article. “The temporary tax reduction for U.S. car imports comes as China heads for its very first annual vehicle sales decline in 28 years amid the trade war and an economic slowdown that’s undermining consumption momentum.” Full article here.


  • …And here’s why: China’s economy is sputtering across the board. According to the WSJ, many economic and industrial indicators in China are causing worry. “Weakness was seen across the industrial sector,” the paper reports (paywall). “Automobile production shrank 3.2% last month from a year earlier, extending a 0.7% contraction in October. Chemical materials and products rose 1.9%, decelerating from 4.4% growth. Retail sales rose 8.1% in November from a year earlier, slowing from an 8.6% year-over-year gain in October.” Full article here.


  • Cuba’s nickel production expected to top 50,000 tons in 2018. Nickel mining is a primary source of export revenue for the Communist country, according to a Reuters article, which has foundered in recent years. However, earnings from nickel are up over last year for Cuba, the 10th largest nickel producer globally (who knew!), so things are looking up for the island nation…at least in regards to nickel production. Full article here.

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The Week That Was

ysbrandcosijn/Adobe Stock

To review what MetalMiner covered over the past week, check out my colleague JP Morris’ excellent rundown here over at our sister site Spend Matters — we couldn’t have written it better ourselves!

A hint of the highlights:

Here’s to a happy and relaxing weekend.

Ed. note: Enjoy this timely dispatch from London by MetalMiner’s Editor at Large.

Not just Europe but the entire world was surprised at Britain’s decision following a referendum in 2016 to leave the EU.

At the time, the media was full of the story but in the interim we have all rather switched off as the negotiations have taken a tortuous route back and forth without appearing to make any progress. Brits have largely despaired that their government will ever come to a workable solution, an opinion reinforced last week when the latest (and according to the EU) final deal was presented to parliament, only for it to be roundly rejected and face the prospect this week of being formally thrown out if it is put to a vote.

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Now, even though Prime Minister Theresa May has just delayed a Commons vote for the plan that was originally scheduled for tomorrow, the prospect of Brexit is not some far-off threat; come the end of March, the UK formally leaves the EU and — whatever happens — will have to accept a new form of relationship with its neighbors.

The questions is, how will we get there at this point?

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Readers in North America can be excused for puzzling why Europeans worry overly about the so-called “Eurozone crisis.”

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They seem to come around periodically. There is a great deal of noise and some volatility in the stock markets, but eventually — whether it is Greece, Spain, Portugal, Ireland, or a combination of several economies — the E.U. seems to have muddled through such crises over the last decade.

Even Brexit is confining its impact to the U.K. economy and has largely left the rest of the E.U. unaffected. But Italy’s latest budget proposals hold the potential for serious disruption, not least because it is the Eurozone’s third-largest economy and a founding member of the trade agreement started in the years after World War II — so its impact is proportionately significant.

So, what is the problem this time, you may ask?

Well, Europe has been slow to recover from the financial crisis of 2008. Debt ballooned in many countries and under the constraints of a fixed currency managed to the advantage of rich northern states like Germany, balance of payments deteriorated as the north imposed austerity on the south (or so many southern states saw it).

The rights or wrongs of the Eurozone’s structure aside, countries like Italy have been constrained for the last decade by fiscal rules set in Brussels. The Italian economy has lagged behind the rest of Europe — unemployment is high and growth is low. As the graphs below courtesy of Stratfor illustrate, the populace has had enough.

Earlier this year, they even surprised themselves by voting in a populist coalition on a platform of radical reform and reflation. That is a policy that puts them at loggerheads with Brussels, which has demanded an Italian deficit reduction that should see the deficit grow by just 0.6%, down from an expected 1.6%, to be achieved by increased austerity measures.

Italy’s new government, a coalition of the Five Star Movement and the League, have presented Brussels with a budget that would see the deficit rise to 2.4% next year, three times higher than an E.U.-mandated target and which Barclay’s Bank is quoted as predicting in The Telegraph will likely exceed 3%, even without a global economic downturn next year.

Italian 10-year debt yields have surged as a result, up near 300 points, not quite at the 400 level seen in the crisis of 2011 but a record four-year high. So far they are only talking about the budget, but nothing has been implemented. After years of QE, banks are holding some €387 billion (U.S. $444 billion) of state debt.

As The Telegraph report observes, banks face mark-to-market losses as yields rise. This erodes their capital buffers, forcing them to curtail lending and further crimping growth. Or, they might have to sell some of their bonds, creating pressure for yields to rise higher.

Either action can quickly turn into a self-feeding “doom-loop,” the paper suggests, as the banks and the sovereign state take each other down.

There is not going to be an Italian sovereign default. Although there are reports of capital flight to Switzerland, it is very unlikely there will be a run on Italian banks as there was in Greece.

However, Italy’s sheer size and core membership of the Euro means Brussels and Rome cannot allow the current standoff to escalate out of control.

Like a runaway super tanker, the situation cannot be easily contained like it was in Greece if the markets genuinely take fright.

You have to have some sympathy for Italy. State spending has always played a massive part in keeping a country together, where geography, history and culture constantly try to tear it apart, a report by Stratfor observed.

Reports of riots in Rome over the appalling state of public services underlines the popular will for public investment, regardless of austerity measures demanded by Brussels. So far, the government has a clear popular mandate to ignore Brussels and go for debt-fueled growth.

Brussels, likewise, is equally set against allowing Italy to buck the rules. The two are on a collision course and set against a backdrop of slowing global growth — outside of the U.S., at least — the economics are not in either party’s favor. Global growth or risk appetite are not going to mitigate the impact of an increasingly indebted Italian economy.

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The stage is set for a potential crisis.

We are not there yet, but in an increasingly nervous investment climate, it could prove a factor in a wider global stock market fall and global retrenchment.

ronniechua/Adobe Stock

You have to ask, after all the damage that America’s threats to rip up the North American Free Trade Agreement (NAFTA) has done to the relationship between the three member countries, whether the eventual outcome this week was worth it.

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Naturally enough, politicians, being politicians, are all hailing the resulting deal as win for all concerned. To ring the changes, they have even come up with a snappy new name: the United States-Mexico Canada Agreement (USMCA), which must have taken all of 10 minutes to concoct.

To come into effect, the USMCA must be ratified by each country’s Congress, which will prove tricky as a new administration takes over in Mexico Dec. 1 and the Republican-controlled Congress is facing mid-term elections next month – hence the Washington-enforced deadline of end September for a deal (otherwise, the U.S. and Mexico threatened to go it alone on their bilateral terms agreed in August).

So, what have the threats, taunts and accusations of the last few months achieved?

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Emerging-market finance ministers must have woken up with a groan Thursday morning as news of yesterday’s Fed hike will have blipped up on their news feeds (that is, if they weren’t up late into the night their time listening to the outcome of last Wednesday’s Federal Reserve meeting).

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The Fed raised the target range for the federal funds rate by 25 bps from 2% to 2.25% during its meeting last week and announced its plans to steadily tighten monetary policy remain intact. Most expect that to mean another rate hike in December, followed by three more next year, and possibly one increase in 2020.

However, worrying as that is for emerging-market debt, the 10-year U.S. Treasuries yield still fell more than 5 bps to 3.048% as the market had expected a more hawkish stance, The Telegraph reports.

The U.S. economy continues to fire on all cylinders as Gross Domestic Product (GDP) expanded at an annualized rate of 4.2%, marking the most rapid growth seen for four years, according to The Telegraph, quoting the U.S. Bureau of Economic Analysis.

The U.S. economy is being fueled by corporate and personal tax cuts stimulating an improving labor market, rising wages, and house inflation with sales of new single-family houses rising 3.5% last month.

It is not just emerging-market currencies that are on a slide against the dollar.

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You can’t open a newspaper, of the online or paper variety, without coming across an article on productivity.

Productivity growth has been meager for the last decade. How to achieve productivity levels seen in the latter part of the 20th century and early part of this one has plagued the minds of economists, politicians and business leaders alike.

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Source: Seeking Alpha

You may ask, why should we be bothered?

The only way an economy can afford to pay its workers more next year than last year, inflation aside, is if the business increases its output per unit of input. Broadly speaking everyone has to be producing more for the same amount of work in order to justify higher salaries, whether that is at the level of the company or the economy as a whole. Economic growth is not enough; it needs to be accompanied by productivity growth to achieve a rising standard of living.

The industrial revolution saw an unprecedented increase in productivity enabled by the automation and mechanization in factories of work that had previously been done by hand by artisanal workers. It was widely expected that the information technology revolution, particularly the internet, would deliver much the same increase in worker output.

But while it has undoubtedly revolutionized both businesses and our everyday lives, it has perplexingly failed to deliver the expected increase in productivity.

An article in the Financial Times makes an interesting contribution to the debate, whether you accept its point of view or not. Rana Foroohar this week penned a post entitled “The Productivity Conundrum” which, while light-hearted in tone, makes an intriguing proposition — maybe low productivity growth is not a failure of the system despite IT, but IT is actually part of the problem.

Foroohar quotes research by economist Alan Blinder who, and I quote, “has raised the possibility that high-speed digital technology – email, apps, etc – are actually reducing productivity by taking us away from our work.” Foroohar quotes other studies that suggest the average person touches his or her phone 2,617 times a day, every time potentially taking their attention away from work, not just for the seconds needed to read the message but for the time required to refocus on the original task.

On an anecdotal level, it is commonplace to see shoppers walking around supermarkets checking their phones or on Facebook. How much longer is that shopping trip taking than it would if they focused on the job in hand?

What is the answer?

Well, it’s not do away with iPhones, emails and messaging services.

The reality is we have all become too dependent on them, and while they may get in the way of our efficiency at work they can facilitate many other aspects of our lives.

The choice is not binary. One option many firms are experimenting with is staying offline for periods of the day when addressing a critical task. The focus that reducing distractions brings not only allows us to be more productive but also more creative, allowing us to not just work faster but work better.

I am not sure what the ideal balance would be. In reality, it is likely to be different for different workers depending on your role, but much like a dieter having to exert discipline in the choice of what to eat and when to eat it, I can already see there will be multiple pressures to maintain the current sloppy status quo. That’s why firms creating guidelines for staff is a good idea. Guidelines allows for role- or industry-specific variability to be accommodated, but also provide a framework for individuals adopt — much of the success of weight watchers is down to the shared nature of the endeavor.

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Turn off that iPhone and close down that app for an hour — you never know, but you may actually be more productive (and less stressed) as a result.

At a recent forum for business leaders, I was surprised the topic of conversation was not Brexit or Donald Trump’s latest tweet, or even cricket, but when the next recession would hit.

That hasn’t been the case for many years now. Since 2009, we have experienced a more or less constant bull market, giving us the longest run of positive growth for a hundred years. Business leaders have been cautiously optimistic growth would continue for the foreseeable future; only recently has the tone changed.

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Not that it has felt quite that joyous — markets have been volatile, particularly commodities, and in Europe government-imposed austerity aimed at balancing excess state spending needed to nurse sick economies back to growth has meant many have felt life has been tough up until the last few years.

But now many in government, industry, academia and even the media are asking the question: when will the next recession hit?

Typically, the media, as here in The Telegraph, are being somewhat more sensationalist about the issue. For example, “The next downturn could rival the Great Depression and wipe $10 trillion off US household assets,” the headline of The Telegraph article reads.

But even so, the article in question makes some sound observations.

Martin Feldstein, president of the U.S. National Bureau of Economic Research and a former chairman of the White House Council of Economic Advisors, was quoted as saying “We have no ability to turn the economy around, fiscal deficits are heading for $1 trillion dollars and the debt ratio is already twice as high as a decade ago, so there is little room for fiscal expansion.”

The worry is that after years of sluggish growth, ultra-low interest rates and the buildup of a massive Federal Reserve balance sheet of assets the world’s major economies lack the fiscal, monetary, and emergency tools to fight the next downturn.

Source: St. Louis Fed

Nor is the U.S. the worst-placed. The economy is still experiencing good levels of growth, the Fed is gradually putting up interest rates (which will allow it to cut later if needed) and the country is blessed with a strong central bank.

But Europe has no fiscal backup, rates are still at record lows and the ECB has committed to holding its reference rate at minus 0.4% until the end of next year, the article states, by which time the end of the cycle could be almost upon us.

Another Telegraph report is suggesting there is a one-in-three chance of a U.S. recession within the next two years, citing the most probable catalyst as the Federal Reserve overtightening monetary policy.

Two economists from the CME Group are quoted as predicting the next recession was unlikely to be caused by mortgage debt or financial panic, as in 2008. Instead, Bluford Putnam and Erik Norland predict the recession will be triggered by U.S. interest rates being raised too high, which will cause trouble in emerging markets and overvalued technology stocks.

Certainly, technology stocks are a concern we all like to ignore when we look at our latest portfolio revaluation. The S&P 500, which is 25% tech stocks, is up 300% since March 2009, while the Nasdaq, which is majority tech stocks, is up 600% — those seem sustainable today based on current earnings, but are they long term?

The stock market, tech stocks included, remains remarkably solid and earnings remain robust such that, at least on current numbers, valuations are not ridiculous.

But economies outside of the U.S. are already showing signs of distress from the modest Fed tightening we have seen so far.

Some emerging-market currencies — like those of Turkey, South Africa and Argentina — already fragile, have taken a pounding this year, dramatically raising local currency costs for dollar-denominated debt.

The biggest gorilla in the room is China, facing a combination of long-term structural issues, such as a shaky shadow banking sector, non-performing debt and a slowing economy due to a trade war with the U.S. that is getting out of control.

The U.K.’s former prime minister Gordon Brown is quoted as saying the world is “in danger of sleepwalking into a future crisis,” adding the next crisis could well start in Asia because of the amount of lending through the shadow banking system.

Unfortunately, the climate of international cooperation is not the same as it was in 2008; today, the focus would be on apportioning blame instead of fixing problems. “Countries have retreated into nationalist silos and that has brought us protectionism and populism. Problems that are global as well as national and local are not being addressed,” Brown is quoted as warning.

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For now there is not much buying organizations can or should be doing. Most expect the next crisis could be 12-24 months away, but the sheer number of parties that are talking about it could herald its arrival by sheer dint of expectation.

The markets appear strangely relaxed about the growing economic and political standoff between the U.S. and China.

Maybe because it has been a slow burn over the last six months or maybe because no one quite believes either side would be stupid enough to allow a full-blown trade war to develop, but markets are generally quite sanguine … so far.

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Yes, the Chinese stock market is down. In addition, commodity prices are depressed relative to where we would have expected them to be back in Q1, when global growth was strong and there appeared little to deflect both mature and emerging markets from enjoying another couple of years of robust growth.

Gideon Rackman, writing in the Financial Times, argues that we are being far too relaxed about this, that for a number of reasons the prospect of these initial $50 billion of tariffs escalating to $200 billion — or worse — is real and the consequences should worry us.

For a number of reasons, neither side is likely to back down.

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