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Japan’s Nikkei 225 jumps 2% as Asia stocks rise ahead of major economic data this week
https://www.cnbc.com/2022/05/30/asia-markets-china-economy-currencies-oil.html
At Davos, a World Economic Forum without economics
Gloomy and foreboding clouds loomed over the Swiss Alps at this year’s annual meeting of the World Economic Forum. Geopolitics dominated conversations in Davos more than ever before as war rages on in Ukraine, food shortages threaten and uncertainty mounts over the U.S.-China relationship.
Russia House on Davos’s promenade, formerly a hub for oligarchs and politicians conducting business, was transformed into an exhibition of alleged Russian war crimes, and the conference was rife with Ukrainian delegates, including the mayor of Kyiv, Vitali Klitschko, petitioning for further support and sanctions against their aggressor.
That conflict and other geopolitical developments, not least of which is the potential for famine in many parts of the world, have business leaders rightly concerned, but what was startling was the lack of emphasis on major economic issues that have them equally apprehensive.
In private conversation, virtually everyone agreed that the combination of inflation, stock-market declines, lockdowns in China and the growing possibility for a major global recession are contributing to a troubling economic outlook. And yet this year’s agenda was short on discussion of these issues. By comparison, in 2009, after the global financial crisis, the Forum was equally gloomy, but acutely focused on economic recovery plans and how the globalized system could respond to the shock.
Davos ends with Germany pushing global work on climate, war
Geopolitics and economics are inextricably linked and Davos usually serves as a place where the two realms can interact to discuss solutions. This year, something was different.
Unsurprisingly, Russian and Chinese delegates didn’t attend, but also absent were many Western politicians. The leading Canadian official there was François-Philippe Champagne, our Minister of Innovation, Science and Industry, but even he didn’t stay long enough to partake in an Invest in Canada event that was sparsely attended, largely thanks to the absence of any Canadian leaders.
Business leaders concerned with growing economic and geopolitical risks all wanted political leaders to be in Davos, to discuss Ukraine, sanctions, China and economic policy, but were left disappointed, and the lack of politicians only added to the uncertain mood. Notable exceptions included German Chancellor Olaf Scholz and Dutch Prime Minister Mark Rutte, who were present and engaged.
Geopolitical discussions, such as Volodymyr Zelensky’s virtual address, packed seats at the Forum. Conversely, discussions on economics were most notable for empty venues. It’s not as if business leaders aren’t seized with the multitude of threats facing the global economy, not least of which is rising inflation, but perhaps it was because on their own they are limited in how they can address them.
This was probably the year that political leaders needed to be at the Forum more than ever. However, it was also the year where it was most difficult for them to attend. During a cost-of-living crunch, a war in Europe, increased inequality, and people becoming more polarized and disenfranchised (not to mention the heightened conspiratorial theories around the Forum), many politicians wouldn’t dare be seen in Davos. That’s partly because of the fear of backlash from constituents and partly a failure to acknowledge that the private sector could contribute to the solution to many of the ills facing the world.
To be clear, it is equally a failure of the private sector to believe that issues such as climate change, which seem to have declined on the Davos agenda, cannot be solved without significant political and regulatory co-ordination and oversight.
In spite of many people’s skepticism about the Forum, those gathered there have a desire and an incentive to prevent the world being plunged into crisis. They come to work with politicians on energy transition, the impacts of supply chain disruptions, labour shortages, food supply and wealth inequality.
Whether the format of the Forum is effective is a separate question, especially as those most affected by these issues sadly are not part of the conversation. But we do need a venue to take on these issues, with both public and private sector involvement. And, in that regard, this year’s meeting failed.
Nevertheless, there were a few positive signs. It seems the shocks of the past two years and the lessons of the past two decades have galvanized a change in approach from capitalism’s leading proponents. Resilience, sustainability and long-termism have been incrementally advanced from the fringes of the Forum over its 50-year history and now have become central.
In addition, it was clear that technology is having positive benefits for the world and can be applied to complex public issues. For instance, a case study was presented about how big data and analytics (provided through a public-private partnership) helped Britain’s National Health Service lead the world on vaccine rollout and is now creating efficiency in dealing with that system’s COVID-19-caused backlog. It is model for other single-payer health systems, including our own.
It is examples such as these that demonstrate the positive impact of the World Economic Forum.
It makes sense that people are fed up with the status quo, but the reality is that with so many economic and geopolitical problems persisting and proliferating, government and business need to come together to chart a path forward. This was the year, above others, when politicians could have stood and defended their participation.
I am not a pessimist by nature, nor an alarmist, but there is a cacophony of economic issues that are very real and very urgent, starting with inflation. For summits such as this to be effective, we need the most powerful people in the world there to debate issues and, ideally, potential solutions. And, whether we like it or not, those people are still our politicians.
Bank of Canada expected to announce another supersized interest rate hike to help tamper inflation
The Bank of Canada is expected to announce another oversized interest rate increase this week, part of its effort to push Canadian borrowing costs rapidly higher in the hope of slowing the pace of consumer price growth.
The central bank is in the middle of its fastest rate hike cycle in decades. After keeping its benchmark interest rate near zero for two years, the bank’s governing council announced back-to-back rate hikes in March and April – the second being an unusually large half-percentage-point move.
Bay Street forecasters widely expect the bank to follow up with another half-point move on Wednesday. That would bring the bank’s benchmark rate up to 1.5 per cent, just a quarter point below the prepandemic level.
How central bankers lost their grip on inflation
A succession of supersized moves would be extraordinary by historical standards. Before the April rate hike, the central bank had not announced a half-point increase for two decades. It typically moves in quarter-point increments.
But Canada’s central bankers seem to be feeling a sense of urgency. The annual rate of inflation hit a new 31-year high of 6.8 per cent in April – more than three times the bank’s 2-per-cent target – and forecasters expect the consumer price index to keep pushing higher in the coming months as a result of surging oil and other commodity prices.
Inflation is also broadening out to a wider range of goods and services, making it harder for Canadians to avoid. And it is increasingly being driven by domestic factors.
“We are confronted with an economy that is showing clear signs of overheating, very tight labour markets and this perfect inflationary storm of global events and preference shifts [in consumer spending],” Bank of Canada deputy governor Toni Gravelle said in a speech earlier this month.
“Simply put, with demand running ahead of the economy’s capacity, we need higher interest rates to cool domestic inflation.”
Central bank officials have said they intend to get the benchmark rate to a “neutral” position – meaning an interest rate level that neither stimulates nor holds back the economy – of between 2 per cent and 3 per cent relatively quickly. Whether the bank stops there or keeps pushing higher will depend on how the economy reacts to higher borrowing costs. In this, the bank will be paying particularly close attention to the housing market.
There are already signs that the real estate sector is slowing in response to interest rate increases. The number of home sales across the country fell 12.6 per cent from March to April on a seasonally adjusted basis, while the home price index slid 0.6 per cent, according to the Canadian Real Estate Association.
“Anyone with a variable rate mortgage should understand what their payment will be with a 50-basis-point increase next week, and they should budget for additional rate increases totalling 1-2 per cent for the remainder of the year,” James Laird, co-founder of Ratehub.ca and president of CanWise Financial, a mortgage brokerage, said in an e-mailed statement.
“Fixed rates have already increased by 1.75-2 per cent, because bond yields have been pricing in the anticipated Bank of Canada rate increases,” he added.
Mr. Gravelle warned in his speech that interest rate increases could have a greater impact on the Canadian economy than they did in the past “because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise.”
Housing market concerns could play a bigger role in the Bank of Canada’s decision-making as it gets farther along in its rate hike cycle. For now, however, the bank’s main task is sounding tough on inflation, according to Andrew Kelvin, chief Canada strategist at Toronto Dominion Bank.
“If the bank spends too much time focusing on the headwinds facing the economy (slower housing activity, crumbling consumer confidence), markets may come to believe that the bank is unwilling to bring inflation under control, causing inflation expectations to become unanchored and requiring a more painful tightening cycle,” he wrote in a note to clients.
There was some earlier speculation that the bank might move more than 50 basis points this week. But Bank of Canada Governor Tiff Macklem seemed to rule this out in an appearance before Parliament last month, saying that such a move would be “very unusual.”
Gold Futures Settle Higher On Weak Dollar, Signs Of Cooling Inflation
Gold futures settled higher on Friday, as the dollar remained weak and data showed a slowdown in the pace of core consumer price growth in the month of April.
The dollar index, which dropped to around 101.55 around mid morning, recovered subsequently and was down marginally at 101.75 a little while ago.
Gold futures for June ended higher by $3.70 or about 0.2% at $1,851.30 an ounce. The most active August contracts ended higher by $3.40 at $1,857.30 an ounce.
Silver futures for July ended up by $0.131 at $22.096 an ounce, while Copper futures for July settled at $4.3065 per pound, up $0.0475 from the previous close.
The Commerce Department’s report showed the rate of core consumer price growth slowed to 4.9% in April from 5.2% in March.
The data has contributed to optimism that the Fed will slow the pace of monetary policy tightening in the second half of the year.
The report showed personal income rose by 0.4% in April after climbing by 0.5% in March. Economists had been expecting another 0.5% increase.
Meanwhile, the Commerce Department said personal spending advanced by 0.9% in April after surging by an upwardly revised 1.4% in March.
Personal spending was expected to increase by 0.7% compared to the 1.1% jump originally reported for the previous month.
A separate report from the University of Michigan showed consumer sentiment in the U.S. deteriorated by even more than previously estimated in the month of May.
The report showed the consumer sentiment index for May was downwardly revised to 58.4 from the preliminary reading of 59.1. Economists had expected the index to be unrevised.
The consumer sentiment index is even further below the April reading of 65.2, slumping to its lowest level since hitting 55.8 in August of 2011.
Ottawa is open to plans by two companies to export liquefied natural gas from the East Coast to Europe to help address energy-security concerns stemming from the war in Ukraine, as long as the projects comply with Canada’s climate goals.
Global and regional energy issues are now intertwined with Russia’s invasion, and the supply picture is undergoing a fundamental shift as European countries move to sever ties to Russian oil and gas.
Natural Resources Minister Jonathan Wilkinson said the federal government believes that LNG projects envisaged for the East Coast could fit into the energy transition toward a cleaner economy. “They would have to minimize domestic emissions so that it’s consistent with our climate plan,” he said during a news conference on Friday.
Mr. Wilkinson made the comments after he and Environment Minister Steven Guilbeault wrapped up meetings with their counterparts at a Group of Seven meeting in Berlin. Canada and its allies have been emphasizing energy security since Russia’s invasion of Ukraine in February, with Europe scrambling to reduce its dependence on Russian energy.
Regulatory, geographic and logistical hurdles could still threaten the viability of the East Coast LNG projects.
Mr. Wilkinson mentioned two proposals as being best positioned to export LNG to Europe: Repsol SA’s Saint John LNG in New Brunswick and Pieridae Energy Ltd.’s Goldboro LNG in Nova Scotia. Those two projects could begin shipping the fuel to Europe within five years.
“We’re obviously listening to the proponents that have put those projects forward, one of which is the project that’s been proposed by Repsol in New Brunswick,” he said. “Because it’s an LNG import facility at this point, a lot of the existing infrastructure that you would need is already there.”
Still, the Canadian government’s commitment to tackling climate change means that any East Coast LNG proposals will need to incorporate electric-drive technology for supercooling natural gas into liquid form. Traditionally, companies have used turbines powered by natural gas in the liquefaction process. East Coast LNG proposals would also need to eventually shift to hydrogen production as the world moves away from fossil fuels.
Yet another challenge is Canada’s lack of infrastructure to any future East Coast terminals. Upgrades and expansions would be needed on TC Energy Corp.’s pipeline system through Ontario and Quebec, in order to connect to a snaking route that leads to the Maritimes & Northeast Pipeline from New England to New Brunswick and Nova Scotia.
Mr. Wilkinson pointed out that GNL Québec Inc.’s Énergie Saguenay proposal already has been rejected by both the Quebec and federal governments. Proposals in Quebec, New Brunswick and Nova Scotia rely on transporting natural gas long distances from Western Canada.
He named LNG Newfoundland and Labrador Ltd. as a possibility, though he noted that is a longer-term prospect. LNG Newfoundland and Labrador is studying the feasibility of securing offshore natural gas from the Grand Banks, aiming to start LNG exports to Europe in 2030.
The Canadian Association of Petroleum Producers welcomed Ottawa’s general support for potential LNG exports.
“Canadian LNG can provide our allies with a source of safe, secure and responsibly developed energy for decades to come while helping to lower global emissions by offsetting the dependence on coal around the world,” CAPP president Lisa Baiton said in a statement. “CAPP believes there is vast untapped potential to build an LNG industry on both the West and East Coasts of the country.”
LNG Canada’s $18-billion terminal is being built in Kitimat in northern British Columbia, targeting customers in Asia. The Shell PLC-led joint venture is the only LNG export project under construction in Canada. Slated to open in 2025, it would become the first LNG export terminal in Canada to ship the fuel overseas.
Russia supplied nearly 40 per cent of the European Union’s total consumption of natural gas last year, according to the International Energy Agency.
Timothy Egan, president of the Canadian Gas Association, said recent energy discussions should also prompt a review of Canada’s transition plans, including issues such as supply security and affordability.
“The security one has been pretty dormant as an issue until this year, until Russia invaded Ukraine, and suddenly it’s top of mind,” he said in an interview on Friday.
The association represents a range of industry members, from distribution and transmission companies to equipment manufacturers and others in the natural gas sector.
Mr. Egan has already met with a half-dozen ambassadors from EU member states rushing to cut their energy ties with Russia, and has more meetings in the coming weeks.
“This is about a seismic shift in the supply picture, and that’s a dramatic change in a very short period of time,” he said.
Mr. Egan has written three letters to Prime Minister Justin Trudeau this spring, the most recent on Friday, in the hopes of sparking a national conversation about Canada’s opportunities to export LNG.
While he said there have been some developments from Ottawa – including the creation of a Canada-EU working group on green transition and LNG – he said more positive signals are key to bolster investor confidence in the kinds of projects that Canada needs to increase its exports.
So much for the electric vehicle revolution
Any successful politician is adept at finding the one bit of good news floating in the ocean of despair, then gushing about it to try to drown our worries.
So it is with U.S. President Joe Biden. A few weeks ago, when the war in Ukraine was propelling gasoline and diesel prices ever higher – regular gas hit a record average of US$4.43 a gallon on Friday – he suggested that painful pump prices will speed the transition to electric vehicles (EVs), fear not.
Voila – no more hard decisions about filling your SUV or feeding your kids. “Transforming our economy to run on electric vehicles, powered by clean energy, will mean that no one will have to worry about gas prices,” he said on Twitter. “It will mean tyrants like Putin won’t be able to use fossil fuels as a weapon.”
Nice idea, except for one minor inconvenience: Gas and diesel aren’t the only commodities turning into luxury goods.
Most of the metals that go into EVs and their massive batteries – copper, nickel, cobalt, lithium, plus a variety of rare earth metals – have climbed even faster than pump prices because they are in exceedingly short supply and high demand. Cobalt two years ago went for US$15 a pound; today it’s US$40. Lithium carbonate prices have climbed about 600 per cent in the same period.
The metals’ scarcity means that the endlessly touted EV revolution will almost certainly be delayed, perhaps long delayed, barring the invention of batteries that use far less of these crucial metals, or none at all. Ditto then green revolution in general, for many of these same metals go into wind turbines and solar panels.
In an interview with The Globe and Mail, Guillaume Pitron, the French journalist who wrote the (recently updated) 2018 book The Rare Metals War: The Dark Side of the Energy Transition and Digitalization, said the shortages “will make the energy transition much longer than we believed and hoped.” He added that the EV market “will be led by the countries and companies that are able to secure the supplies of strategic resources. For now, China is leading that race.”
Quickly cutting Russian gas imports to Europe could backfire
Already, Tesla boss and co-founder Elon Musk is screaming about excruciating metals prices while quietly jacking up the prices of Tesla cars to make them even less affordable for the average family. According to the Wall Street Journal, the average price of a Tesla is US$52,200, up almost 3 per cent since late 2021.
Last month, Mr. Musk used a tweet to bemoan the “insane” cost of lithium and suggested that “Tesla might actually have to get into mining and refining directly at scale, unless costs improve.”
Mr. Musk has been a lot smarter than most auto executives in protecting supply chains. As far back as 2020, just before the price charts went vertical, he realized that shortages could translate into production and profit-margin squeezes. He negotiated a cobalt supply deal with Glencore, the world’s biggest producer of the metal that is essential for battery production. No more middleman.
General Motors and BMW recently did similar deals with Glencore, through presumably at a much higher price. Tesla is now trying to replicate the process with nickel producers.
In March, Volkswagen announced a joint venture with two Chinese companies to secure nickel and cobalt supplies from Indonesia. The deal thrusts VW into the mining industry, taking a page from the supply chain strategy created by Henry Ford a century ago. Mr. Ford was so obsessed with security of supply that he bought coal mines, timberlands, sawmills, a railroad and a fleet of freighters to make sure iron ore and other materials would reach his factories.
It is not out of the question that Mr. Musk or Tesla will buy, or at least invest in, one of the mining companies that supplies the EV maker with metals. Last year, there were even vague rumours that Mr. Musk, the world’s richest man, was talking about buying Glencore, whose market value is now £60-billion (US$73.48-billion). That’s pocket change for Tesla, which is worth about US$830-billion.
Supply problems, including delays in receiving semiconductors, have extended the wait times for Teslas and rival EVs. This week, Mr. Musk warned that Tesla may stop taking orders because the delays for some models in some markets are already a year or so. “Our issue is not demand, it is production,” he told a Financial Times conference on the future of cars.
A classic economist would say that the best cure for high prices is high prices, which is generally true. Translation (in the metals context): Outrageous prices for copper, nickel, cobalt and lithium will trigger extra production, flooding the market with these metals and bringing their prices down to their historic norm.
Not so in this case. While the in-ground reserves of some metals are genuinely in short supply, such as copper, others, notably lithium, are blessed with generous reserves on several continents. But that’s not the point. The point is that building mines to extract the lithium, and plants to process it, can take five to 10 years. Cobalt mines can taken longer. “The biggest hurdles, in my view, are ecological, social and political – not geological,” Mr. Pitron says.
Every big automaker inthe world is ramping up EV production. Forecasts say that tens of millions of these cars will be produced each year by the middle part of this decade. Maybe not. In the United States alone, about 13 lithium-ion plants are in the construction or planning stages – but what is not known is where the lithium will come from. There is only one operating lithium mine in the U.S. European and Japanese carmakers face similar supply constraints.
The EV revolution is beginning to look like an evolution. EVs are coming, but not at pedal-to-the-metal speeds.
Economic Calendar: May 30 – June 3
Monday, May 30
Japan machine tool orders for April.
Euro area economic and consumer confidence readings for May.
Germany consumer price index for May and April retail sales.
(830 am ET) Canada’s current account balance for the first quarter. Consensus is for a surplus of $3.2-billion.
U.S. markets closed for Memorial Day.
—
Tuesday, May 31
China Purchasing Managers’ Indexes for May. The manufacturing index is expected to see a reading of 49, and non-manufacturing 45 – both signifying contraction.
Japan jobless rate, retail sales, industrial production and consumer confidence.
Euro area consumer price index for May. It’s expected to rise 7.7% from a year earlier, up from April’s reading of 7.4%.
Germany unemployment; France CPI, GDP and consumer spending. Italy also releases GDP and CPI.
(830 am ET) Canada real GDP for the first quarter. The economy is expected to have expanded at a 5.2% annual rate. For March, GDP is expected to have risen 0.5%.
(9 am ET) S&P Corelogic Case-Shiller 20-city Home Price Index. Consensus is for a year-over-year rise of 19.7%. FHFA housing price index also to be released.
(945 am ET) Chicago PMI.
(10 am ET) Conference Board Consumer Confidence Index for May. It’s expected to decline to 103.5 from April’s 107.3.
Earnings include: HP Inc.; Salesforce.com Inc.
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Wednesday, June 1
China Caixin manufacturing PMI. Japan releases PMI numbers as well as first-quarter capital spending.
Euro area releases manufacturing PMI for May, forecast at 54.4 – signifying expansion. Euro area also releases jobless rates. UK releases PMI and housing price data.
(930 am ET) Canada S&P global manufacturing PMI.
(10 am ET) Bank of Canada policy announcement. An interest rate hike of 50 basis points is widely expected.
(945/10am) Manufacturing indexes released in the U.S.
(10 am ET) U.S. construction spending for April. Consensus is for a rise of 0.6%.
(10 am ET) U.S. job openings and labor turnover survey for April.
(2 pm ET) U.S. Beige book released on economic conditions.
North American auto sales for May.
Earnings include: Algoma Steel Group Inc.; Canaccord Genuity Group Inc.; Descartes Systems Group Inc.; Hewlett Packard Enterprise Co; HIVE Blockchain Technologies Ltd.; Laurentian Bank of Canada; Nio Inc.; Sprott Physical Gold and Silver Trust
—
Thursday, June 2
OPEC+ meeting.
Euro area producer price index for April. It’s expected to be up 38.6% from a year ago, accelerating from the previous month’s reading of 36.8%.
(830 am ET) Canada building permits for April. They are expected to decline 1.5% after a 9.3% drop in March.
(1045 am ET) Bank of Canada Governor Beaudry presents economic progress report to Gatineau Chamber of Commerce.
(815 am ET) U.S. ADP National employment report.
(830 am ET) U.S. weekly initial jobless claims.
(830 am ET) U.S. productivity unit labor costs for the first quarter.
(10 am ET) U.S. factory orders. Consensus is for a rise of 0.7%.
OPEC+ meeting
Ontario election
Earnings include: Broadcom Inc.; CAE Inc.; Lululemon Athletica Inc.
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Friday, June 3
Japan and euro area release PMIs. Euro area also reports April retail sales.
(830 am ET) Canada labour productivity for the first quarter. It’s expected to have risen 0.3% after having declined 0.3% in the fourth quarter of last year.
(830 am ET) U.S. nonfarm payrolls for May. Consensus is for net job gains of 325,000, down from April’s 428,000. The unemployment rate is expected to decline a notch to 3.5%, with average hourly earnings rising 5.2% from a year earlier.
(945 am/10 am) More U.S. PMIs.
Earnings include: BRP Inc.; Crowdstrike Holdings Inc.
Two investment banks cut their China GDP forecasts even lower
https://www.cnbc.com/2022/05/26/two-investment-banks-cut-their-china-gdp-forecasts-even-lower.html
The Indo-Pacific Economic Framework: What it is — and why it matters
No Canada!
