Yields – USA
Comments of particular interest are noted with ‘*’.
- USA Yield curves are an odd shape in the current form, with a huge sag in the middle. A review of current and pre-GFC curves shows some differences. Some commentators consider the current duration has not been long enough. Others comment on the ‘shape’ of the curves. Opinions are invited.
- Base metal inventories continue to remain tight. Most prices are in the ‘nose of pinch-point graphs. Pinchpoint positions are mostly less than 1 week’s consumption. More media commentary is recognising this condition. However sentiment (geopolitical) continues to drive prices over fundamentals.
- The USA Fed met last week and cut rates a bit. Trump took umbrage and announced further “taxes” (tariffs) on Chinese imports. The markets took this hard, as a further level of uncertainty and volatility, and parts of the market appear to have capitulated. Base metals’ contangos is one example.
*Copper The size of the world copper market has been progressively underestimated.
*Cobalt Indian JV Co formed to seek sources of Li, Co, et al. Volvo cars with recycled Co produced.
*Nickel BHP Group plans to start production of nickel sulphate in the Jun20Qtr.
Zinc & Lead ZMI’s Kildare Zn project. Pb supply improving (for now).
Tin China switched to being a net exporter of refined tin last year.
*Aluminium: quote: “Trump’s trade war with China is backfiring and impacting the US economy”.
Gold Central Banks adding to holdings. Trump vows more tariffs on China. Global uncertainty increases.
Platinum & Palladium WPIC upbeat on surge in Pt EFT holdings.
*Oil USA share of growth is strong, with light crude; heavier Iranian and Venezuelan output is down..
Coal China again planning to limit imports, after a strong start to the year.
Iron Ore China prices fell as Brazilian exports picked up, on Vale restarts.
Shipping Freight rates slowed from a peak earlier in July.
*USA – Yield Curves: an examination of the current and an earlier period. A signal not a cause.
USA – PMI: Still positive, though still slower outlook.
*USA – Construction Spending: -ve growth for Total and Private & Residential spends.
Japan – Industrial Production: slow down for IP and several segments.
Australia Exploration, USA
Comments of particular interest are noted with ‘*’.
Australian exploration spending is recovering, showing confidence in the medium to longer term, despite current geopolitical and sentiment noise. The world is still looking for resolution to trade and tariff wars, and is starting to look through the noisy rhetoric of political announcements for the likely real impacts.
This week, analyst comments on China see through the high level PMI numbers, showing that commodities imports are in fact growing.
Toyota’s thinking on EVs is more commercial than most.
*Copper China’s imports of Cu ‘concentrates’ at new highs, though import of ‘refined’ Cu dipped.
*Cobalt Lesson in boom-bust, though the Co outlook remains good. It is all the timing of supply & demand.
*Nickel Toyota’s battery philosophy! INSG forecasts a fourth year of deficits for Ni.
Zinc & Lead Glencore agreed Zn TCs with subsidiary Noranda Income Fund. Secondary Pb to be ShFE listed.
Tin Suspension of PT Surveyor Indonesia has ended, and it is able to export again.
Aluminium Aluminium Bahrain (Alba) ramping up its line-6 potline.
*Gold Monetary tightening expectations eased. USA February jobs data is encouraging (patience).
Platinum & Palladium Details of the world’s eight largest palladium producers. Pd price is approaching 2x Pt price !
*Oil A myriad of factors: Expect USA to be disciplined by prices, and Saudi & Russia balance the mkt.
Coal Seaborne HCC prices buoyant. Thermal negotiations under way. USA coal shipments hindered.
Iron Ore China’s iron ore imports at a 10 mo low in February.
Shipping Cape rates still suffering. Panamax & Supramax rates are up.
*Australia – Mineral & Energy Exploration: Mineral & Petroleum spending continued recovery.
*Port Hedland – Iron ore shipments: Small positive 12 mo growth for yr to February.
*China: Caixin & NBS PMIs & GDP – Clyde says ‘look at commodity imports’.
*USA – House Starts: Negative growth though better than December’s fall.
*USA Construction Spending: slow positive growth but residential spend is down.
The constant theme remains that most commodity markets are tight, some very tight, yet markets’ sentiment continues to focus upon the rhetoric, noise and fears of outcomes of USA sanctions, and tariffs, and potential impacts of slowdowns in Chinese growth rates. There is also inordinate attention paid to some spot markets which have very small volumes of material traded, and to not really provide representative prices.
A key question is what catalyst(s) is required for the market(s) sentiment to divert gaze from the noisy froth toward the continually tightening fundamentals?
Copper Cu market remains fundamentally tight. The looming EV surge will just tighten it further.
Cobalt China’s cobalt metal price fell last week with panic spot sales. Spot liquidity is very thin.
Nickel Glencore sees structural Ni deficits continuing. New Caledonia is to vote.
Zinc & Lead Spot Zn concentrate TCs increased. Estimates for Pb deficits have increased.
Tin There are two tin markets with different participants. ShFE wants to attract more ‘industry.
Aluminium Keep an eye on USA-China meetings, the G20 meeting.
Gold Diwali commences 7th Nov. USA Midterm elections are 6 Nov.
Platinum & Palladium Pt production is increasing.
Oil 2nd tranche of sanctions effective 5 Nov. Though key customers exempted.
Coal Met coal market appears balanced amidst tight supply.
Iron Ore China’s winter restrictions begin. Not all details known yet.
Shipping Shipping rates down this week.
USA – PMI: continued strong growth.
USA Construction Spending: Strong growth.
Japan Industrial Production: slower growth in last two months.
The history of almost three decades of USA yield and interest rates, as shown above, highlight a risk that when interest rates invert, particularly when 3mo yields/rates exceed 10 yr yields, a downturn often follows. While several in the markets have expressed concerns that the USA yield curves are flattening, they currently do not appear to be close to inverting.
Another viewpoint on yield curves is expressed as the margins or differentials between long-duration and short-term rates. When (parts of) yield curves invert, the short term rates exceed the long term rates and the differentials (long less short) become negative.
It is interesting to note that for the 2008-09 financial crisis, the USA 10yr-2yr yield differential fell below zero in early 2006, which was at the same time that USA Residential Construction Spending yr-on-yr growth rates peaked (January 2006) and turned downward, well ahead of the wider recognition of the financial crisis in Sept-Oct 2008.
We consider that the USA indicators are not currently foreshadowing a comparable risk of downturn, though draw attention to historical data signals that bear watching closely.
As has been said before, history does not repeat itself, but it often rhymes.
USA Construction Spending for July recorded +5.8% yr-on-yr growth, which is quite strong growth, and consistent with rates over the past 3-4 months. This is reflecting current ongoing steady and strong economic growth in USA, accelerated somewhat by stimuli from Washington, which have been described by some economists as unnecessary.
What is interesting however is looking back in time and noting that Residential Construction Spending peaked and decisively turned down in February 2006, well ahead of the sharp decline of the global financial crisis (12 September 2008 when short term US interest rates also recorded a dive). Non-Residential Construction Spending did not peak till November 2008 (roughly when 10 yr bond yields reduced).
Those involved in new house construction had clearly decided to pull back on spending in that segment approximately 18-24 months prior to the financial crisis actually being recognised and hitting the wider markets. … Surprisingly, much of the market had expressed no great sense of alarm at the time until the September quarter of 2008.
The financial mess that was the loans approval systems, and other financial instruments, related to the USA housing construction sector was truly only a ‘financial’ crisis, (similar in a sense to the 1987 financial crisis, related to over-valuation of shares).
What changed the level of the crisis was when banks no longer had confidence in lending to each other, and for example, stopped issuing letters-of-credit. The ‘financial‘ crisis then morphed into an ‘economic‘ crisis, as the inability to obtain letters of credit meant that, among other impacts, producers selling mineral concentrates, or other products, who normally obtained a letter of credit to ensure payment upon arrival and receipt of goods, and ship owners who would obtain a letter of credit to ensure payment upon discharge of cargo at destinations, could not get those (bank-backed) letters assuring payments.
The 2008-9 crisis actually stopped trade! That is where the comparison with the 1987 crash differs; the 1987 trade in products, minerals and metals barely missed a beat, with ‘industry not suffering greatly. Consequently the somewhat bruised share markets were able to recover in a relatively short few years.
Fortunately the current levels and trends of US housing construction are not suggesting that any crisis is looming
There have been some mutterings about the finance approvals for US vehicle sales, which had recovered faster and further than housing in the USA. Residential Construction peaked at USD 683,903m in January 2006, and has recovered so far to USD 566,595m as at July 2018. Housing Starts peaked at 2.3 million units in January 2006, and by May 2018 had recovered to 1.8 million units while Orders-to-Vehicles had peaked in July 2007 at USD 44,810m and as at July 2018 was well past this at USD 60,117m. (I do not expect that orders to vehicles (part of the Durable Goods manufacture grouping, will include imports). However I have no further particular insights into vehicle finance approvals in the USA at present.
USA Construction Spending – Residential & Non-Residential. Source: USA Bureau of Census, Matau Advisory