| |1. Copper: Economic Risks Ahead and Options' Downside SkewСр., 18 апр.[−]
Copper prices are often said to reflect the health of the global economy, hence the moniker “Dr. Copper.” Between January 15, 2016, and December 28, 2017, copper prices rose by 72% as China’s pace of growth picked up and emerging-market nations such as Brazil and Russia began to recover from recession while the rest of the global economy boomed. This year, however, copper prices are about 5% off last year’s highs and copper options appear more concerned with downside risks than higher prices. Here’s a look at copper’s demand and supply, and possible trajectory.
|↑|5. Three Things to Keep in Mind for Friday’s Employment ReportСр., 04 апр.[−]
The February jobs report was a killer: 313,000 new jobs were created, with an additional 54,000 in upward revisions. Average hourly earnings growth, however, was much less impressive, growing only 2.6% YoY and just 0.4% after factoring for inflation. So, despite the unemployment rate holding at 4.1%, companies are hiring briskly but wage growth is mysteriously absent. Looking ahead to the March employment report due on Friday, April 6, there are number of items to look for:
1) Total Labor Income: A Holistic Look at Labor Markets
The Bureau of Labor Statistics (BLS) reports labor market data in a fairly atomistic fashion. Unemployment is calculated from a household survey. The number of jobs created is presented as a month-on-month change from a survey of establishments. Average hourly earnings are usually presented as a year-on-year change. The number of hours worked are a monthly series and remains largely overlooked.
When we evaluate the March 2018 data (or any other employment report), we prefer to standardize these measures by looking at the change in non-farm payrolls and number of hours worked as a year-on-year percentage change. This way it lines up with the percentage change in average hourly earnings. More importantly, it allows us to calculate total labor income, which is the total number of people working multiplied by the average number of hours multiplied by their average hourly earnings.
Total Labor Income = Number of Workers X Average Hours Worked X Average Hourly Earnings
This is a much more comprehensive view of labor market conditions than looking at non-farm payroll data by itself and obsessing over whether it was a few tens of thousands of jobs more or less than expected in an economy that employs over 148 million people. Figure 1 shows that the growth in total labor income looks like overtime as well as the growth in its individual components. Basically, since 2010, its been growing very consistently at around 4%. In the past several months it’s been slightly but not alarmingly above that trend at around +4.4% year on year.
As the labor market has tightened, a few subtle shifts have happened within the labor market. Despite February’s strong employment gains, overall, the pace of hiring has slowed moderately. In 2014, the total number of people working grew by 2.2%. In recent months that growth rate has come down to around 1.4-1.6%. As the labor market has tightened growth, average hourly earnings have perked up but again, not by much. From 2010 until 2015 they rose at around 2% per year. Starting early 2016 they accelerated to around 2.6% year on year. They remain well below the 3.0-3.5% pre-crisis pace.
|↑|8. Will a Sino-U.S. Trade War Impact Grain, Meat Markets?Ср., 28 марта[−]
With China threatening to retaliate against U.S. agricultural producers after the White House announced $50 billion in tariffs, it’s a good time to evaluate how China influences agricultural prices – both directly and vicariously. In a direct sense, China is primarily a buyer of U.S. soybeans – imports it could replace with supplies from Argentina and Brazil. It is also an importer of U.S. wheat, which it could find in Russia and Ukraine. The U.S. in no longer a big exporter of corn to China but it does export a great deal of pork and, increasingly, beef.
To the extent that China retaliates against the U.S. by imposing tariffs on agricultural goods, it will disadvantage U.S. producers to the benefit of their foreign competitors. That said, agricultural goods are to a large extent fungible. If China reduces imports from the U.S., it will have to increase imports from elsewhere. If other countries increase their exports to China, they won’t be able to export as much to other markets, which, in turn, creates an opportunity for U.S. farmers to send their goods elsewhere. As such, the overall impact on prices may not be as dramatic as many fear – although it likely won’t be positive either.
China’s biggest influence on agriculture is indirect. As we discussed in our previous paper, China’s pace of economic expansion exerts an enormous influence on the prices of industrial metals and energy products. By extension, it also influences the value of currencies of commodity exporting nations. It turns out that China’s growth rate also has a similar but somewhat delayed impact on the prices of many agricultural goods such as corn, soybeans, soybean oil, rough rice and wheat but for reasons that are somewhat different than one might think.
That China would influence metals prices is obvious: the country consumes 40-50% of most of the world’s industrials metals. By contrast, China consumes only about 7% of the world’s crude oil. Even so, China’s growth influences crude oil prices mainly because of crude oil’s extreme demand-and-supply inelasticity: small fluctuations in demand and supply have outsized impacts on prices. China’s direct impact on agricultural prices has, of course, to do with its massive population (4x that of the United States). China consumes about 20% of the global food supply.
While China’s tremendous economic growth has increased its calorie count from 2,500 per day in 1990 to around 3,200 per day in 2017, on a year-on-year basis, fluctuations in China’s growth rate have only a weak correlation with actual changes in food consumption (Figure 1). This is true both of China’s official GDP measure as well as the Li Keqiang alternative measure of growth.
|↑|9. Could the Initiation of Trade Skirmishes Lead to Trade Wars?Пн., 26 марта[−]
The biggest current threat to global growth is a trade war. There are other risks, too. The U.S. Federal reserve is unwinding quantitative easing and raising rates, but is making the policy shifts very gradually, with careful market guidance. Governments are focused on whether they need to cut taxes, not raise them; so, no growth risks from fiscal policy. Consumer confidence is relatively high around the world, from mature industrial countries to young emerging-market nations. Equity market valuation might appear high to some, but stock market corrections do not cause recessions unless there is a financial panic – and systematic risks from financial institutions are much lower than when the last crisis occurred in 2008. After considering the other risks, we stand by our analysis that if the current synchronized global economic expansion is derailed, the most likely cause will be a trade war. YET, we are optimistic. So far, the actions taken earn only the terminology of “Skirmishes,” but if they escalate to “Battles” and then a “Trade War,” we will need to re-assess the risks. Here is our review of the issues and challenges.
The trade skirmishes began in earnest in March 2018 with the U.S. imposing tariffs on steel and aluminum in the name of national security. The U.S. temporarily exempted Mexico and Canada pending progress on the NAFTA negotiation, and then eventually agreed to exempt Europe. The European Union had threatened to retaliate with highly focused tariffs, from jeans to bourbon to motorcycles, designed to hit some hot-button pain points involving name-brand companies. Later in March, the U.S. leveled tariffs on China, aimed at intellectual property.
In progress in the spring of 2018 are the U.S.-Canada-Mexico negotiations over the North American Free Trade Agreement (NAFTA). While technical committees involved in the negotiations reportedly have made some progress on the small issues, the big issues that separate the U.S. from Canada and Mexico revolving around domestic-content rules (think autos) and how to handle disputes (the U.S. wants a system more to its liking), are far from being resolved. Indeed, while the U.S. rhetoric about unfair trade practices is often aimed at China, the steel and aluminum tariffs can also be seen as bargaining chips in the NAFTA negotiations. Our take-away is that the U.S. is only a very short step away from announcing its intention to withdraw from NAFTA. We note that announcing the intention to withdraw triggers a six-month waiting period. At the end of the six months is when the final decision to withdraw or not would be made.