Call: 1-204-414-9106
Private payrolls grew by just 132,000 in August, ADP says in reworked jobs report
https://www.cnbc.com/2022/08/31/adp-jobs-report-private-payrolls-grew-by-just-132000-in-august.html
An Iran nuclear deal revival could dramatically alter oil prices — if it happens
China is set to convene a historic meeting on Oct. 16. Here’s what to expect
Job openings top 11.2 million in July, well above estimate and nearly double the available workers
Capital markets slowdown dents BMO’s quarterly profit and overshadows strong lending trends
A steep drop in revenue from capital markets dragged down Bank of Montreal’s BMO-T -2.57%decrease third-quarter profit despite strong demand for loans from retail clients, bringing a tepid earnings season for Canada’s large banks to a close and underlining the uncertainty those lenders face in the coming months.
An abrupt slowdown in underwriting and advisory work for investment bankers, compounded by weaker revenue from trading, loomed large over BMO’s quarterly results. Capital markets revenue fell 20 per cent year-over-year and profit was down 53 per cent, to $262-million. The drop-off was most acute in the investment and corporate banking unit, where revenue fell 36 per cent, as many corporate clients sat on the sidelines to wait out market upheavals.
In a possible sign that BMO doesn’t expect deal-making to return any time soon to the booming levels seen last year, the bank reported $49-million in severance pay in its capital market division as it trims staff in an effort to maintain profitability. The bank did not reveal how many jobs it is cutting.
The slowdown in capital markets was not unique to BMO – revenues from investment banking and trading divisions fell at most Canadian banks in the fiscal third quarter, which ended July 31. It was most pronounced at banks such as BMO and Royal Bank of Canada, which have built a larger part of their business on serving U.S. clients in capital markets.
However, there are “early signs” that activity among clients in Canada and the United States could be starting to pick up, BMO’s chief financial officer Tayfun Tuzun said in an interview. “Capital markets typically don’t stay closed for lengthy periods of time. So I think history is on our side. At one point, the wheels will start turning.”
Downbeat capital markets results overshadowed what was otherwise a good quarter for the bank’s core retail-banking business, which caters to commercial and personal borrowers in Canada and the U.S. Demand for new loans was robust, driving revenue up 13 per cent in Canada and 12 per cent in the U.S. division, while profit margins on loans also improved.
BMO is the last of Toronto’s major banks to report its third-quarter earnings, capping off a string of mixed results. Three of the Big Six banks, including BMO, fell short of analysts’ expectations for profits. And each bank reported earnings that were hobbled by weak capital markets activities and modest increases to provisions against loan losses, in spite of good underlying trends in retail lending.
But with growing uncertainty about the prospect of an economic slowdown as central banks rapidly raise interest rates to beat back high inflation, investors are looking for clues about how much that could reduce demand for new borrowing.
“That is the big question, in terms of how higher interest rates, by slowing down economic growth, will impact loan growth in different parts of our business,” Mr. Tuzun said in an interview. “The market is still, to a certain extent, struggling to measure the impact of higher interest rates and the timing of that slowdown.”
BMO’s shares fell 2.6 per cent to $124.49 on the Toronto Stock Exchange on Tuesday, and rival banks have also suffered declines in their stock prices after reporting quarterly results.
“The market reaction has been negative, as the [Canadian] banks have underperformed the TSX over the past week,” said Jim Shanahan, an analyst at Edward Jones.
BMO joined rival banks in building its reserves against possible losses from defaulting loans, though actual write-offs are still at unusually low levels. The bank earmarked $136-million in provisions for credit losses – the funds banks set aside to cover loans that could go bad. Of that sum, $32-million was set aside largely because the economic forecasts that BMO uses to predict future losses got slightly worse, requiring more provisions against loans that are still being repaid today.
Although credit losses are expected to tick higher in the coming quarters, returning to more normal levels, “that normalization probably will be orderly,” Mr. Tuzun said.
BMO’s quarterly results also suffered from the impact of two accounting items recorded as large losses. BMO booked a $649-million after-tax loss related to a hedging strategy to offset the risk to capital from rising interest rates when it closes its $17.1-billion acquisition of California-based Bank of the West. In the previous quarter, the bank recorded a $2.6-billion gain on the same hedge, however. And last week, Toronto-Dominion Bank recorded a $505-million after-tax loss on a similar hedging strategy tied to its pending US$13.4-billion deal to acquire First Horizon Corp.
BMO also took $88-million in writedowns on underwriting commitments from its role in loan syndicates, though about 90 per cent of those losses are unrealized, and the value of the underlying assets could change. Similarly, Royal Bank of Canada reported $385-million of markdowns in its disclosures last week, with three-quarters of them unrealized.
BMO earned $1.37-billion, or $1.95 per share, in the fiscal quarter that ended July 31. That compared with $2.28-billion or $3.41 in the same quarter last year. After adjusting to exclude one-time items, including the accounting loss on its hedging strategy, BMO said it earned $2.13-billion or $3.09 per share. On average, analysts expected $3.17 per share, according to Refinitiv.
“Although BMO’s quarter fell shy of consensus forecasts, the negative elements of the period were isolated to the capital markets business,” said Gabriel Dechaine, an analyst at National Bank Financial Inc., in a note to clients. That weakness should be “transitory,” he added, but the tailwind from rising interest rates, which should boost profit margins on loans, “is a more sustainable driver for the bank.”
BMO’s net interest margins – the difference between what it charges on loans and pays on deposits – increased by 10 basis points in Canada and 21 basis points in the U.S. during the quarter. (100 basis points equal one percentage point). That helped drive profit from Canadian personal and commercial banking up 17 per cent to $965-million, and 3 per cent to $568-million in the U.S.
Europe’s economies sail toward recession as Russian gas cuts bite
European Union economies seem headed for a recession as Russian gas supply cuts push up prices and limit availability, exposing the bloc’s industrial sector.
Gazprom’s decision to reduce capacity at the Nord Stream 1 pipeline to 20% has severely reduced the supply of Russian gas to the continent. EU countries, dependent on Russia for 41.1% of their gas requirements in 2020, responded by agreeing to reduce gas consumption by 15% between August and March 2023.
With governments likely to prioritize households in the distribution of available gas supplies, energy-intensive industries such as chemicals, cement and metals will likely face the brunt of the rationing, reducing industrial output in economies already bruised by the impact of inflation on consumer spending power.
“We’re looking at a situation where the European economy has lost significant momentum, mainly due to record high inflation, and the [energy] shock is worse in a worsening economy,” said Diego Iscaro, senior Europe economist at S&P Global Market Intelligence. “We think recession is very likely late this year or early 2023. Even the third quarter of this year is looking quite weak.”
Contraction ahead
The economic damage will be much more severe if Russia decides to turn off the taps completely.
“A complete end to Russian gas exports would cut eurozone GDP by around 2% whilst rationing was in place in addition to the one percentage point cut due to higher inflation,” Andrew Kenningham, chief European economist at Capital Economics, wrote in an August 9 research note.
Swiss bank UBS forecasts a recession with three consecutive quarters of economic contraction if Russia cuts off the gas supply to Europe.
Gas prices have rocketed as European countries seek supplies to fill their stocks ahead of winter. Plans have been made to build new LNG terminals to increase capacity for gas imports, while investments in nuclear power and renewables are also receiving more support. However, these projects will take time to bear fruit.
The Biden administration has pledged to increase exports of LNG to the EU and established a task force to design measures to reduce European reliance on Russian energy. The supply commitment has been likened to the Marshall Plan in 1948, which helped European economies reconstruct following World War II.
“The plunge in Russian gas flows to Europe will continue to support European gas price levels for at least the next few years,” said Ornela Figurinaite, gas analyst at S&P Global Commodity Insights. Figurinaite noted that current constraints in capacity to regasify liquified natural gas back to atmospheric temperature will keep prices high enough to reduce demand in the industrial and heating sectors.
The eurozone economy is already feeling the strain. The S&P Global Market Intelligence Eurozone composite purchasing managers index, or PMI, survey fell into contractionary territory in July for the first time since February 2021, with the manufacturing sectors in the region’s major economies — Germany, France, Italy and Spain — all registering declining PMIs.
Germany at risk
The German economy is particularly vulnerable to gas rationing, according to Iscaro. “The industrial sector is quite large compared to GDP and they have quite a strong reliance on Russian gas,” he said.
At 18% of GDP accounted for by manufacturing in 2021, Germany is more dependent on the sector than many other leading Western economies. In the U.S., manufacturing accounts for 11% of GDP, while in the U.K. it is just 9%.
Capital Economics calculates that a 50% reduction in output in energy-intensive industries would directly reduce German GDP by 2%, while ripples through the supply chain would double that cost to 4%.
Germany, which lacks large LNG terminals, is particularly exposed to Russian gas, having decided to decommission its nuclear fleet in the wake of the Fukushima disaster in 2011. Reduced output from France’s nuclear fleet has limited another important source of power for the continent.
Russian gas supplies to the EU were 30% below the average for the past five years according to the EU Commission, and the struggle to find replacement supply has left German gas stocks 29.1% below the level of a year earlier, according to Commodity Insights.
Interconnection brings vulnerability
The interconnectedness of the eurozone economy means there will be knock-on effects from a downturn in German manufacturing. Emerging European countries such as the Czech Republic and Slovakia have significant roles in the supply chain of Germany’s industrial powerhouse.
Energy rationing and high prices could persist beyond the next year even as the eurozone develops the infrastructure to import more LNG and reduce its reliance on Russia.
“Even after the necessary regasification capacity becomes available in Europe, we still need growth in global liquefaction capacity for prices to stabilize,” said Commodities Insights’ Figurinaite.
Shielding consumers
Consumer spending has also taken a hit as energy costs soar. Consumer price inflation in the eurozone rose to a record high 8.9% in July, limiting household purchasing power. Retail sales in the eurozone fell 1.2% month over month in June with the sharpest declines seen in Germany and the Netherlands.
European countries are likely to enact fiscal policies designed to shield citizens from the worst effects of scarce gas.
“Governments are likely to react the same way they reacted to the pandemic,” Iscaro said. “In France, subsidies are being used to limit the increase in energy prices, but also other countries, like Greece, have put in place measures worth 3% of GDP.”
Oncoming colder weather will add another dimension to the grim economic outlook.
“If we have a particularly cold winter things can go pretty bad quite quickly,” Iscaro said.
Gold Sleeps And Drifts Lower- The Catalysts That Could Ignite The Precious Metal
Gold futures on the CME’s COMEX division reached a record high of $2,072 per ounce in March 2022, slightly eclipsing the August 2021 $2,063 previous all-time peak. The ascent of gold futures began in 1999 when the price found a bottom at $252.50 per ounce during the UK’s sale of half the country’s reserves. While the UK sold a significant percentage of its holdings, other countries did not follow. Over the past twenty-two years, countries, central banks, and monetary authorities worldwide have been net buyers of the metal, validating its role in the global financial system.
At the $1,745 level on the active month December COMEX futures on August 30, gold has corrected 15.8% from the March 2022 high. However, the price remains seven times higher than the 1999 low, and the prospects are for even higher highs over the coming months and years.
A correction takes gold lower, but the long-term pattern remains bullish
While the gold price dropped by nearly 16% over the past five months, the long-term trend remains bullish.
As the chart highlights, the pattern of higher lows and higher highs since 1999 remains intact as gold traded to a low of $1679.80 in July 2022, higher than the $1673.70 low from March 2021. Gold stopped falling at the correct technical level after the March 2022 high, but higher interest rates and a strong US dollar continue to weigh on the price in late August.
Russia’s declaration could start a trend in the gold market
Facing the US and European sanctions after Russia invaded Ukraine, Moscow decided to back 5,000 roubles with one gram of gold. Backing the Russian currency with gold caused it to rise against the US dollar. Meanwhile, the dollar’s value has increased against the euro and other reserve currencies over the past months.
The chart illustrates the upward trajectory of the dollar index, which measures the US foreign exchange instrument against the euro, pound, yen, Canadian dollar, Swedish krona, and Swiss franc.
The Russian rouble has strengthened against the US dollar since the March 2022 low. The rouble is trading at the highest level against the US dollar since early 2018 and reached a seven-year peak in June 2022. The strong rouble is a sign that the implied backing with gold has strengthened the Russian currency.
The geopolitical arena supports higher gold
The February “no limits” agreement between Russia and China creates bifurcation between the world’s nuclear powers. Deteriorating relations between China/Russia and the US/Europe impacts trade and threatens world peace. While a tense geopolitical landscape supports gold, Russia’s move to back its currency with the precious metal could be a gateway for China to follow.
Over the past years, Russia and China have been high-profile gold buyers, adding to reserves. Since Russian and Chinese stockpiles are state secrets, it is impossible to identify just how much gold the countries purchased. However, since China is the world’s leading gold producer and Russia is third behind Australia, a significant percentage of annual output is likely flowing into the countries’ reserves.
China has the second-leading economy, and the potential for backing the yuan with gold could significantly impact fiat currency values and the path of least resistance for gold over the coming years. The bottom line is the geopolitical landscape supports a higher gold price.
Inflation and/or recession could ignite the price
Gold is an inflation barometer, but the monetary tools to control the economic condition are bearish for the metals price. Rising US interest rates increase the cost of carrying long gold positions and make fixed-income investments more attractive. Moreover, higher US interest rates support the US dollar, which rose to a two-decade high over the past weeks. A rising dollar tends to weigh on the gold price.
Meanwhile, two consecutive quarters of US GDP declines is the textbook definition of a recession, and rising interest rates only increase recessionary pressures. Throughout most of 2021, the US central bank and administration called inflation a “transitory” event, blaming it on supply chain bottlenecks and pandemic-inspired factors. In late 2021, they had an epiphany, and now, fighting inflation is their primary goal. In 2022, the Fed and administration are calling declining GDP a “transition” instead of an economic decline. With the mid-term elections on the horizon, “transition” is a politically correct description they hope will resonate with voters.
After falling asleep at the wheel on inflation in 2021, the Fed and Washington DC could be doing the same regarding economic contraction in 2022. In his latest speech on Friday, August 26, Fed Chairman Jerome Powell reiterated the commitment to fighting inflation with monetary policy, saying higher interest rates “are the unfortunate costs of reducing inflation.”
In another sign that the Fed may reserve course despite the Chairman’s latest comments, the July US personal consumption expenditures (PCE) index rose by 6.3%, under the 6.8% rise in June, and far less than the July consumer and producer price index data. Inflation is coming down, and the Fed will continue to attempt to push it to the 2% target level. However, the medicine for inflation may only exacerbate the recessionary pressures, causing the need for a more dovish approach in 2023, which would support gold’s price.
Gold is a hybrid- More volatile than currencies, but less price variance than commodities
Gold walks a fine line between a financial and commodity or industrial asset. Price variance in the gold market is higher than in currencies but lower than in commodities.
The chart shows twenty-year historical volatility in gold at the 9.26% level.
The metric in the dollar index is lower at 5.07% over the same period
In the crude oil futures market, a leading industrial commodity, the historical price variance metric is at 35.98%, far higher than in gold.
Gold is unique, and the world’s governments validate its position in the financial system. While the world’s leading economy continues to battle inflation with hawkish monetary policy, ignoring the rising recessionary wave could plant the seeds for the next move to a higher high in the over two-decade-long gold bull market.
Nat-Gas Prices Sink On Lower European Gas Prices And Mixed U.S. Weather
Oct Nymex natural gas (NGV22) on Tuesday closed down -0.294 (-3.15%). Oct nat-gas Tuesday dropped to a 1-week low on negative carry-over from a -7% slump in European nat-gas prices to a 1-week low. A mixed U.S. weather outlook also sparked long liquidation in nat-gas futures after the Commodity Weather Group Tuesday said above-normal temperatures are expected in the West and north central U.S. from Sep 4-8, but mild temperatures are expected for the Northeast and South.
Nat-gas prices last Tuesday fell back from a 14-year nearest-futures high on the announcement of a delay in the restart of the Freeport LNG export terminal. The Freeport terminal said Tuesday that it won’t reopen until early to mid-November, later than a previous announcement of a restart in October. That will delay an increase in U.S. nat-gas exports and allow U.S. nat-gas storage inventories to build.
Nat-gas prices last Tuesday rose to a 14-year high after Russia said it would halt gas flows through the Nord Stream pipeline to Germany for three days on Aug 31, fueling speculation that the pipeline won’t restart as planned after the maintenance work. The surge in European nat-gas prices has sent electricity costs soaring as German electricity prices for next year climbed to a record 995 euros a megawatt-hour last Friday, and French electricity prices jumped to a record 1,130 euros a megawatt-hour. In crude oil market terms, it’s the equivalent of crude at $1,600 a barrel.
Lower-48 dry gas production on Tuesday was 98.3 bcf, up +6.4% y/y, according to Bloomberg NEF data. Lower-48 state total gas demand on Tuesday was 73.7 bcf/day, up +7.7% y/y, according to Bloomberg NEF data. LNG net flow to U.S. LNG export terminals Tuesday was 10.8 bcf/day, down -1.5% w/w.
A decline in U.S. electricity output is bearish for nat-gas demand from utility providers. The Edison Electric Institute reported last Wednesday that total U.S. electricity output in the week ended Aug 20 fell -3.2% y/y to 86,685 GWh (gigawatt hours). However, cumulative U.S. electricity output in the 52-week period ending Aug 20 rose +3.1% y/y to 4,124,735 GWh.
Nat-gas prices have support as EU countries agreed to cut nat-gas demand from Russia by 15% over the next eight months. Also, Russia recently slashed nat-gas exports to Europe to 20% of capacity, putting upward pressure on European nat-gas prices. Russia has already halted nat-gas shipments to Demark, Finland, Bulgaria, Netherlands, Poland, and Latvia and reduced supplies to Germany for not acceding to its demand for gas payments in Russian rubles.
Nat-gas prices have seen downward pressure from the prolonged outage at the Freeport LNG export terminal, which curbed U.S nat-gas exports and put upward pressure on domestic supplies. The Freeport terminal accounted for about 20% of all U.S. nat-gas exports before the explosion on June 8 knocked it offline. The Freeport LNG terminal receives about 2 bcf, or 2.5%, of the output from the lower-48 U.S. states.
As a longer-term bullish factor, the ongoing drought in the U.S. West has drained rivers and reservoirs, with Lake Mead and Lake Powell falling to record lows. That threatens to curb power produced by hydropower dams and will prompt electric utilities in the U.S. West to boost usage of nat-gas to increase electricity to satisfy power demand for air-conditioning this summer. The U.S. Energy Information Administration said on June 1 that the drought could drive down generation at California’s hydro dams between June and September to 7 million megawatt-hours, well below the 13 million megawatt-hour median for summer generation between 1980 and 2020.
Last Thursday’s weekly EIA report was bearish for nat-gas prices as it showed U.S. nat gas inventories rose +60 bcf to 2,579 bcf in the week ended Aug 19, above expectations of a +55 bcf increase. Inventories remain tight and are down -9.5% y/y and -12.0% below their 5-year seasonal average.
Baker Hughes reported last Friday that the number of active U.S. nat-gas drilling rigs in the week ended Aug 26 fell by -1 to 158 rigs, which was slightly below the 3-year high of 161 rigs posted in the week ended Aug 5. Active rigs have more than doubled from the record low of 68 rigs posted in July 2020 (data since 1987).
Crude Slumps On Reduced Chance For An OPEC+ Production Cut
Oct WTI crude oil (CLV22) on Tuesday closed down -5.37 (-5.54%), and Oct RBOB gasoline (RBV22) closed down -18.58 (-6.84%).
Crude and gasoline prices Tuesday sold off sharply, with gasoline falling to a 3-week low. Reduced concern about a cut in OPEC+ crude production weighed on oil prices Tuesday. Also, Tuesday’s slump in the S&P 500 to a 1-month low curbs confidence in the economic outlook that is bearish for energy demand.
Crude prices retreated Tuesday after Tass reported that OPEC+ is currently not discussing a potential cut in crude production. Crude prices rallied last week when Saudi Arabia raised the possibility that OPEC+ might need to restrict supply due to a disconnect in oil futures prices.
Weakness in the crude crack spread is bearish for oil prices as the spread dropped to a 5-1/2 month low Tuesday. The weaker spread discourages refiners from purchasing crude oil to refine into gasoline.
A supportive factor for crude was weekend comments from Iran that said that talks with the U.S. about reviving a nuclear deal will drag on into next month, curbing speculation that an imminent agreement would lift sanctions against Iran and allow Iranian oil exports onto the global market.
In a bullish factor, Vortexa reported Monday that the amount of crude stored on tankers that have been stationary for at least a week fell -7.8% w/w to 100.70 million bbls in the week ended August 26.
Reduced Chinese crude demand is bearish for prices. Chinese refineries in July handled the least amount of oil since March 2020 as Covid lockdowns and refinery shutdowns for maintenance undercut crude demand. As a result, China’s apparent oil demand in July fell -9.7% y/y to 12.16 million bpd, and China’s Jan-July apparent oil demand is down -4.6% y/y to 12.74 million bpd.
OPEC+ production in July rose by +260,000 bpd to 29.050 million bpd, according to the IEA, but is still running more than 2 million bpd below quotas due to various supply disruptions and capacity constraints. Nigerian and Libyan crude output has fallen in recent months due to damaged pipelines in Nigeria and political unrest in Libya, undercutting the overall OPEC+ production level. Crude oil exports from Libya, home to Africa’s largest oil reserves, dropped to a 20-month low of 610,000 bpd in June. However, Libyan Oil Minister Mohammed Oun recently said that Libya’s crude production should rise to 1.2 million bpd in early August as oil facilities are brought back online.
Crude prices fell slightly from their Tuesday afternoon closing level after the API reported that U.S. crude supplies rose +593,000 bbl last week. The consensus is that Wednesday’s weekly EIA crude inventories will fall by -950,000 bbl.
Last Wednesday’s EIA report showed that (1) U.S. crude oil inventories as of August 19 were -6.6% below the seasonal 5-year average, (2) gasoline inventories were -7.9% below the seasonal -year average, and (3) distillate inventories were -23.9% below the 5-year seasonal average. U.S. crude oil production in the week ended August 19 fell -100,000 bpd to 12.0 million bpd, which is only -1.1 million bpd (-8.4%) below the Feb-2020 record-high of 13.1 million bpd.
Baker Hughes reported last Friday that active U.S. oil rigs in the week ended August 25 rose by +4 rigs and matched the July 29 2-1/4 year high of 605 rigs. U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signaling an increase in U.S. crude oil production capacity.
