Articles in Category: Macroeconomics

Pragmatically, you could hope Indian Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) focus on Hindu nationalism is more a smokescreen to deflect attention from a deteriorating economy than it is the start of India’s spiral to increasing polarization and fragmentation of its multicultural democracy.

The economy has certainly been on a slide for much of the last year and the BJP has been harassed increasingly by the opposition Indian National Congress over its handling of the economy.

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India’s consumer price index increase reached 7.35% in December 2019 from a year earlier, the third month in a row in which it has breached the Reserve Bank of India’s 4% target.

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2020 will — economically, anyway — be shaped in no small part by what happens in China.

The world’s second-largest economy has been on a slide in terms of GDP growth for years now. The 18-month trade war with the U.S. has contributed to that decline and has been the cause of considerable investor anxiety.

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November proved to be a strong month for housing starts in the U.S.

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According to recent data from the U.S. Census Bureau and the Department of Housing and Urban Development, housing starts in November came in at a seasonally adjusted annual rate of 1.37 million, which marked a 3.2% increase from October and 13.6% from November 2018’s 1.20 million.

In addition, single-family housing starts reached a rate of 938,000 in November, which was up 2.4% from October. The rate for units in buildings with five units or more was 404,000.

Meanwhile, units authorized by building permits in November came in at a seasonally adjusted annual rate of 1.48 million, up 1.4% from October’s 1.46 million. The November rate was also up 11.1% compared with November 2018 permits.

The rate for single-family housing permits reached 918,000, up 0.8% from October, while authorizations for units in buildings with five units or more totaled 524,000.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Housing completions reached a seasonally adjusted annual rate of 1.89 million in November, down 6.6% from October but up 7.3% on a year-over-year basis. Single-family housing completions were down in November, reaching a rate of 883,000 (down 3.6% from October). Completions of units in buildings with five units or more checked in at a rate of 295,000.

Fannie Mae upgrades housing forecast

In other housing news, in a report this week, Fannie Mae touted “strength in labor markets and consumer spending” as factors behind its sunnier forecast for the U.S. housing market.

According to the Fannie Mae Economic and Strategic Research Group, homebuilders are set to expand production as a result of strength in the aforementioned economic indicators.

“Housing appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment. Risks to growth have lessened of late, as a ’Phase One’ U.S.-China trade deal appears to be in place and global growth seems likely to reverse course and accelerate in 2020. With these positive economic developments in mind, we now believe that the Fed will hold interest rates steady through 2020.”

GM workers went on a nationwide strike, the first since 2007 at the Big 3 automaker. Photo by Jeffrey Sauger for General Motors

Industrial production in the U.S. moved in a positive direction in November, aided in part by the end of the nationwide strike at General Motors that spanned over September-October.

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According to the U.S. Federal Reserve’s monthly industrial production index, production gained in November after falling in three of the previous four months (production increased 0.8% in August).

The industrial production index reached a value of 109.2 in November (a value of 100 is equivalent to industrial production levels in 2012). The index bounced back from the September value of 108.5.

“These sharp November increases were largely due to a bounceback in the output of motor vehicles and parts following the end of a strike at a major manufacturer,” the Fed said in a release. “Excluding motor vehicles and parts, the indexes for total industrial production and for manufacturing moved up 0.5 percent and 0.3 percent, respectively. Mining production edged down 0.2 percent, while the output of utilities increased 2.9 percent.”

By market group, manufacturing production jumped 1.1% in November from the previous month, while durables increased 2.2%.

Meanwhile, the “indexes for primary metals and for computer and electronic products advanced 1 percent or more, while the indexes for nonmetallic mineral products, furniture and related products, and machinery declined modestly,” according to the Fed.

The news come amid encouraging developments on the trade front.

Last week, the U.S. and China announced they had reached an agreement in principle on a “phase one” deal, one that would see the U.S. pull back $160 billion in tariffs in exchange for increased purchases of U.S. agricultural goods by China.

Meanwhile, the White House and House Democrats also reached an agreement regarding revisions to the United States-Mexico-Canada Agreement (USMCA), the proposed successor to the 1990s-era North American Free Trade Agreement (NAFTA).

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Both deals have yet to be finalized, however. (For further commentary on recent trade developments, read Don Hauser’s article published earlier this week.)

Despite a somewhat chaotic year, with markets buffeted by trade wars and geopolitical risks, the global economy has continued to expand (albeit at a slower pace than previously).

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The market’s reaction to media coverage of trade wars has no doubt been a factor in depressing share price performance and, more importantly, to postponing investments that would otherwise have stimulated more significant growth.

Economic growth in some regions has undoubtedly been hit by the knock-on effects of the trade war.

China has arguably been hit the hardest, but the drop in consumption there has spilled over into major suppliers of luxury goods, autos, and machinery — such as Germany.

But a recent Stratfor report paints a more promising picture for 2020, suggesting a combination of factors should see a gradual recovery.

Source: Stratfor

The recovery would — indeed, could — be much stronger but for politicians’ unwillingness to use fiscal stimulus in some countries.

Again, Germany leads the pack here, as a deep-seated commitment to always balance the budget philosophically prevents them from using fiscal stimulus, even though it would be of considerable benefit — not just to Germany but also its neighbors in the E.U.

By keeping growth sub-optimal in Germany, growth remains anemic across much of the E.U. Stratfor predicts 1% growth for 2020. Only the U.K. may manage better, now that it has settled its political infighting and the re-elected Conservative government budgets for substantial infrastructure investment, said to be £100 billion over the next five years.

Europe is not alone in having limited fiscal firepower to boost growth. As Stratfor observes, emerging markets are also set for a difficult 2020.

Argentina will be mired in an economic crisis, the Stratfor report says. Brazil and India will each struggle to make the structural reforms necessary to resume higher levels of growth. The Turkish economy, driven by unsustainable levels of stimulus, may continue its slow recovery — but no quick acceleration is likely.

Meanwhile, developed markets have no capacity to cut interest rates and limited appetite for quantitative easing along the lines employed following the financial crisis.

It is to be hoped that with the upcoming 2020 elections, President Donald Trump will make resolving trade disputes a key goal.

The United States-Mexico-Canada Agreement (USMCA) is expected to be approved by Congress after the White House and House Democrats recently reached an agreement over revisions.

Meanwhile, the U.S.-China trade war is showing some encouraging signs of a thaw but still has a long way to go. U.S.-E.U. discussions probably have a lot of disappointments in store before a deal is struck.

Broadly, though, progress in these areas should reduce tensions and encourage investment. Stratfor makes the point that the impact of these disputes is waning (see the graph below):

Source: Stratfor via Bloomberg Economics

As time goes by, the status quo becomes the new normal and firms find a way to cope. If this is correct, it means 2020 should be less disrupted than 2018-2019 has been and offers the prospect of continued growth — maybe not strong growth, but certainly positive.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

After 10 years of a bull market, that’s probably the best one can expect from a late-cycle growth curve.

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Gold prices surged this year due to greater uncertainty in the global macroeconomic environment.

By August, the price briefly regained the $1,500/ounce price point and stood at $1,460/ounce in late November.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Over the longer term, gold prices and the dollar tend to move in an inverse relationship, as demonstrated by this chart, which shows prices from July 2012 through early November 2019:

Source: MetalMiner data from MetalMiner IndX(™)

However, the relationship does not always hold true.

More recently, we’ve once again seen a break in the relationship, which started late last year (the vertical blue dotted line above) and picked up steam around June.

Source: MetalMiner data from MetalMiner IndX(™)

Both gold and the dollar trended up in value overall, especially from July until September. However, gold prices gained greater momentum and increased by a greater measure than the dollar. Then, both values fell in September and October.

The relationship appeared to switch back to an inverse pattern in November.

Gold prices and the dollar-yuan exchange rate

Source: MetalMiner data from MetalMiner IndX(™)

Because the value of the yuan is set by the central government, the graph above using the CNY/$ exchange rate serves as a proxy to examine the relationship between the currency and gold prices.

Keeping in mind that a higher value on the right axis means a weaker yuan, we should expect to see these two prices moving together.

As the yuan weakens against the dollar, gold prices weaken. As the yuan rises in value, gold prices rise in value.

In real life, the relationship gets impacted by multiple variables. The yuan and the dollar do not have to move in an inverse pattern; the yuan is not a commodity but a currency (the same is true for gold).

However, in recent months, the gold price appeared to more tightly follow the CNY/$ exchange rate in a predictive fashion, rather than holding to its longer-term inverse dollar relationship.

This type of pattern emerged during 2016, as well.

Will quantitative easing by the Fed send gold prices up in Q4?

Monetary policy is known to impact commodity prices.

Quantitative easing is a form of monetary policy; therefore, we can expect any such actions in this direction to impact gold prices.

Quantitative easing can be used when interest rates are already quite low. In effect, it increases liquidity in the system, thus spurring growth.

U.S. Federal Reserve balance sheet since 2008

Source: Board of Governors of the Federal Reserve System

Quantitative easing occurs when the government purchases certain financial assets, which in turn raises the value of the assets but lowers their yield.

Basically, easing targets asset classes that are performing poorly, thus correcting losses for financial institutions. This, in turn, allows financial institutions to lower borrowing rates, creating more liquidity in the system.

The ease of access to funds by businesses and individuals then stimulates economic growth.

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What this means for industrial buying organizations

With the overall macroeconomic environment characterized as unstable, gold prices may generally continue to trend higher in the short term, as gold gets used as a hedge.

However, over a longer period, current monetary policies could weaken prices once more — assuming they take effect as intended.

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Despite the plunge in temperatures, housing activity around the country heated up in October.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Housing starts rise in October

According to the U.S. Census Bureau and the Department of Housing and Urban Development, privately owned housing starts in October reached a seasonally adjusted annual rate of 1.31 million, up 3.8% from the revised September estimate of 1.27 million.

The October number was also up 8.5% from the October 2018 total of 1.21 million.

Meanwhile, single-family starts for the month reached a seasonally adjusted annual rate of 936,000, marking a 2.0% increase from September. Starts for units in buildings with five units or more reached an adjusted annual rate of 362,000.

Permits up 5.0%

Meanwhile, privately owned housing units authorized by permits reached a seasonally adjusted annual rate of 1.46 million units, which marked a 5.0% increase from the September total and a 14.1% increase compared with October 2018.

Meanwhile, permits for single-family authorizations reached an adjusted annual rate of 909,000, up 3.2% from September. Permits for units in buildings with five units or more reached an adjusted annual rate of 505,000.

Housing completions rise 10.3%

Housing completions in October reached a seasonally adjusted annual rate of 1.26 million, which marked a 10.3% increase compared with September. The October total was also up 12.4% on a year-over-year basis.

Single-family housing completions reached a seasonally adjusted annual rate of 897,000, up 4.5% from September. Completions of units in buildings with five units or more reached an adjusted annual rate of 354,000.

Existing-home sales rise in October

The National Association of Realtors (NAR) earlier this month reported existing-home sales increased in October.

Existing-home sales increased 1.9% over September levels, the NAR reported.

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“Historically-low interest rates, continuing job expansion, higher weekly earnings and low mortgage rates are undoubtedly contributing to these higher numbers,” said Lawrence Yun, NAR’s chief economist. “We will likely continue to see sales climb as long as potential buyers are presented with an adequate supply of inventory.”

The median existing-home price in October reached $270,900, up 6.2% on a year-over-year basis. Meanwhile, housing inventory as of the end of October reached 1.77 million units, which marked a 2.7% decline from September and a 4.3% decline from October 2018.

You could be excused in the U.S. for overlooking the fact that the U.K. is going through a snap election campaign.

Any such coverage of the U.K.’s upcoming election is being drowned out by the U.S. media’s hourly reporting of the varying prospects for the numerous Democratic contenders and the daily tussles between lawmakers and the current incumbent in the White House – all this before the 2020 presidential election year has even started.

British general elections rarely raise much interest outside the country, although Britain’s “first past the post” election system means the country has only experienced one peacetime coalition (2010–2015) since the Lloyd George ministry ended in 1922.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Yet even with the potential such a system holds for more extremist parties to take power, the Brits have rarely voted in parties radical enough to cause ripples outside their own borders.

Dec. 12, however, may be a different matter.

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In previous downturns, Beijing has taken a range of stimulus measures to keep the economy growing robustly; as a result, it has contributed positively to global GDP and commodity prices.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

But this time around Beijing seems to have a greater tolerance for slowing growth.

While stimulus measures are expected as early as December, the Financial Times reported, they are not expected to be on the scale of those seen in 2008-2009 and 2015-2016.

Freya Beamish, an analyst at Pantheon Macroeconomics, is quoted by the Financial Times as saying China’s stimulus in the 2018-2019 period will be equivalent to about 7% of GDP over the two-year period. Measures taken in 2015 and 2016 were worth 10% of GDP, while the 2008-09 stimulus amounted to 19% of GDP, according to an OECD estimate.

Beijing appears constrained by a number of factors, policy-driven and economic, in what it can do and how far it can go.

Office space is at an all-time high in some Chinese cities, forcing the delay and cancellation to high-profile skyscraper projects and more general office developments, the Financial Times reported.

Following a surge in new residential housing starts earlier this year, growth has since moderated and is expected to slow further in 2020. Beijing seems reluctant to undermine the currency by further monetary easing and is particularly sensitive to avoiding property price rises by stoking demand.

The Financial Times reports that Chinese states and municipalities are already heavily indebted and banks are reluctant to increase bad debts. While infrastructure lending is the most likely form of stimulus, it will probably not be on the same scale as previous measures.

A former Chinese bank official is quoted as saying that due to previous infrastructure investments, “Cities and provinces are having trouble financing new projects as they must spend a significant portion of their cash-paying off debt.” Possibly as a result of this, investment spending grew by only 3.4% in the first three quarters of this year.

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This moderation in appetite for further stimulus coming on top of the cooling housing market undermines the case made in a recent article we reviewed suggesting steel prices could be set for a recovery, extrapolating on the apparent recovery of the Chinese steel sector.

If the Financial Times is correct in its analysis above, any current strength in Chinese — and, by extension, southeast Asian — steel prices could be relatively short-lived.

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This morning in metals news, the Federal Reserve has cut interest rates for the third time this year, AK Steel released its third-quarter financials and 16 steel industry associations praised the work of the Global Forum on Steel Excess Capacity.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Fed Cuts Rates Again

For the third time this year, the Federal Reserve announced a downward adjustment to its federal funds rate.

The Fed lowered its federal fund target rate range by one-quarter of a percentage point, down to 1.50-1.75%.

“Information received since the Federal Open Market Committee met in September indicates that the labor market remains strong and that economic activity has been rising at a moderate rate,” the Fed said in a release. “Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.”

In a pair of tweets, President Donald Trump again criticized the Fed and its chairman, Jerome Powell.

“People are VERY disappointed in Jay Powell and the Federal Reserve,” Trump wrote. “The Fed has called it wrong from the beginning, too fast, too slow. They even tightened in the beginning. Others are running circles around them and laughing all the way to the bank. Dollar & Rates are hurting our manufacturers. We should have lower interest rates than Germany, Japan and all others. We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is! We will win anyway.”

AK Steel Releases 3Q Results

Ohio-based AK Steel announced adjusted EBITDA of $86.9 million in the third quarter, down from $160.8 million in 3Q 2018.

Net sales of $1.5 billion in the third quarter marked a 12% year-over-year decrease.

“Our third quarter results were essentially in line with our expectations despite a challenging environment,” CEO Roger K. Newport said. “We continued to make solid progress in our strategy to focus on higher-value business during the quarter. As we look to 2020, we are excited about our prospects, particularly in automotive where we expect meaningful market share growth.”

Steel Associations Applaud GFSEC Members’ Work on Excess Capacity

A group of 16 steel industry associations around the world released a statement praising the work of members involved in the Global Forum on Steel Excess Capacity and asking for that work to continue.

In addition, the associations “called upon the few dissenting members to reconsider their current position as quickly as possible.”

“According to the latest OECD information, there are 440 million metric tons of steel excess capacity in the world today. This is an increase of 6.5 percent over last year,” the groups said in a joint statement. “Governments of steelmaking economies worldwide must redouble their efforts to address this persistent global excess capacity in the steel sector, eliminating the support measures that cause it, and implementing strong rules and remedies that reduce excess capacity. We call on governments to continue the work on the issue of steel excess capacity without delay.”

China has been critical of the forum, arguing that it has done enough to work toward addressing the issue of steel excess capacity, the South China Morning Post reported.

The U.S. has also been critical of the forum, claiming it has not been effective.

“The decision by a vast majority of Global Forum members to continue the work of the Forum beyond 2019 is a recognition that severe excess capacity is a continuing crisis,” the Office of the United States Trade Representative said Saturday. “The Global Forum’s policy prescriptions and information-sharing process will not alone resolve the crisis of excess capacity in the global steel sector. This will only happen when those that have created the problem take concrete steps toward true market-based reform. Participation in the Global Forum process is a signal of each member government’s commitment to adhere to principles intended to ensure market-based outcomes.”

In 2017, the USTR said the forum “has not made meaningful progress yet on the root causes of steel excess capacity.”

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The groups issuing the call for continued action were: Steel Manufacturers Association (SMA), American Iron and Steel Institute (AISI), EUROFER (the European Steel Association), Canadian Steel Producers Association (CSPA), CANACERO (the Mexican Steel Association), Alacero (the Latin American Steel Association), Brazil Steel Institute, The Japan Iron and Steel Federation (JISF), European Steel Tube Association (ESTA), Specialty Steel Industry of North America (SSINA), South African Iron and Steel Institute (SAISI), The Cold Finished Steel Bar Institute (CFSBI), Indian Steel Association, Association of Enterprises UKRMETALURGPROM (Ukraine), Russian Steel Association, and The Committee on Pipe and Tube Imports (CPTI).