Midday Macro - Semi-weekly Color – 6/24/2022
Market Recap:
Price Action and Headlines:
Equities are higher, with an overnight rally picking up speed at the NY open, later helped by more positive economic data that reduced inflationary and recessionary fears keeping the current relief rally going
Treasuries are lower, with the 30yr under the most pressure, helping the curve steepen a little, although on aggregate, Treasuries are still notably higher on the week, with the 10yr yield at one point down close to 50 bps from its 3.5% high
WTI is higher, sitting a little over $107 a barrel and reestablishing a more positive trend channel after reaching $101 earlier in the week, as time spreads and distillate demand continue to indicate a still tight market
Narrative Analysis:
Equities are having a good day and now week, seeing outperformance from a mix of sectors, unlike recent defensive leadership earlier in the week, with Powell's Congressional testimony and other Fed officials speaking elsewhere not coming across more hawkish than what was seen from the June FOMC meeting. Today’s data showed housing was still chugging along despite growing “affordability” pressures. At the same time, the consumer, more pessimistic than ever, did not materially raise their inflation expectations, something being watched extremely closely now. Treasuries are taking a break from their multi-day rally with increased growth and reduced Fed tightening expectations helping to steepen the curve. Oil price action is also suggesting a better growth outlook as traders continue to focus on time and crack spreads. However, copper still can’t get a bid, flat on the day despite a more risk-on tone. The agg markets are mixed but look to basing after recent losses. Finally, “King Dollar” is little changed, with the $DXY at 104.17 due to commodity currencies higher while the Yen drifts lower.
The Russell is outperforming the S&P and Nasdaq with Small-Cap, Growth, and High Dividend Yield factors, and Financials, Materials, and Industrials sectors are outperforming on the day.
@KoyfinCharts
S&P optionality strike levels have the Zero-Gamma Level at 4014 while the Call Wall is 3830. While the volume and open interests have built at 3800, the 4000 strike is the largest gamma level for SPX/S&P, and now has growing gravity. The loss of negative gamma due to June’s OPEX has reduced volatility, allowing a more bullish tilted drift in stocks. This bullish tilt has also been supported by drops in rate volatility, as seen in a lower MOVE index, supporting the drop in the VIX.
@spotgamma
S&P technical levels have support at 3880, then 3855, and resistance at 3900, then 3915-20. The official “bear market level” of 3855 has been cleared in today’s breakout. That level will now be key support. Yesterday’s false breakdown setup (with the touch on 3745 and then the recapture of 3765) is increasingly occurring after a basing period during this step-up rally. Given the fundamental uncertainty, this pattern currently has strong predictive power. Further, an inverse head-and-shoulder formation has now formed.
@AdamMancini4
Treasuries are lower, with the 10yr yield at 3.12%, higher by around 3.2 bps on the session, while the 5s30s curve is steeper by 3 bps, sitting at 8.5 bps
Deeper Dive:
The expected “recession” looks to be already upon us, with the economy slowing fast. The hard data is increasingly confirming what we have been seeing in the falling consumer/business confidence/sentiment levels for some time. Funny enough, this is allowing risk assets, specifically equities, to hold a bid this week as the macro narrative pivots slightly with future disinflationary forces strengthening and Fed tightening expectations easing, driving yields lower, and allowing high-growth/multiple tech and safe-haven/high-yield names to both rally. To be clear, the macro backdrop is still overtly negative, and a clear catalyst to signal we are entering a more positive period does not yet exist as the mosaic of negative macro factors will take a long time to improve. With that said, the market narrative that we are entering a pronounced slowdown sooner which will re-trend inflation lower (towards the Fed’s target) while not being detrimental enough to derail the labor market and consumption, is gaining traction. We agree with this outlook currently (given no new shocks), and given how connected and fast-moving “economic participants” (consumers, firms, investors, and policymakers) have become, it is not surprising that things are moving so quickly.
Expectations that inflation is finally peaking are primarily coming from increasing deflationary pressures building in discretionary goods. Inventory levels are renormalizing, with many industries looking to be overstocked, given miscalculations on consumer preferences changing due to higher than expected inflation. Logistical cost pressures are still high but look to be increasingly falling (despite higher fuel costs) as reduced urgency is reversing the pricing power many carriers/shippers enjoyed over the last year. There is increasing evidence that goods such as household furnishing, apparel, and new/used cars are all seeing reduced demand faster than expected.
*Retailers are seeing less foot traffic across the board, with apparel being especial hit hard recently
*Manheim is still showing price pressures for the majority of used vehicles continued this month, but interestingly, pickups dropped by -1.2% YoY, something we see as a leading indicator
Service sector-related inflation is also cooling, with high-frequency data (mobility and credit card usage) showing reduced leisure and hospitality activity, leading us to conclude that discretionary service firms will have reduced ability to pass on price increases moving forward. A drop-off in airfare costs, up 18% and 12% respectively in the past two months, would increase our conviction and be a strong headwind to rises in the headline and core CPI prints. We believe this will occur as consumers cancel/change vacation plans due to less financial security. However, rises in shelter costs remain problematic, with rents still climbing strongly in recent data thanks to the strong jobs market and housing affordability problems. There is a lot of urban apartment supply coming online moving forward, but it looks like pricing pressures will be maintained there for some time.
*Credit card data, when adjusted for price increases, shows less spending by all consumer income levels
*The re-opening high is wearing off, and instead, consumers are increasingly making decisions based on increases in their “costs of living,” prioritizing staples over discretionary spending
In summary, there is increasing evidence that demand for discretionary goods and services is falling faster than expected. Given that investor sentiment is currently driven by inflation expectations (which is increasingly driving policy expectations), any decrease in future inflationary pressures is seen as more positive than the weaker demand outlook causing it. This is why price action in equities and rates underway this week has been more favorable. The bottom line is (for now), a more convincing “peaking” in inflation (especially for core inflation) narrative is taking hold. This is reducing Fed tightening expectations, with the market now expecting the terminal rate back around 3.5% from 4% following the hotter-than-expected May CPI print. Powell also re-emphasized core-PCE as the primary inflation gauge driving policy in his Congressional testimony. Further, although numerous Fed officials, including Powell, continue to express concerns over de-anchoring inflation expectations, today’s University of Michigan consumer inflation expectation prints were seen as positive, given they did not rise. When you add in falling commodity prices, with oil, gas, and grain futures off highs, markets are beginning to believe an end to the current inflation saga is starting to be in sight.
*Expectations are for annual headline and core inflation rates to still increase in the coming months, but at a decreasing rate, with reduced pricing pressures increasingly expected to occur into year-end
Finally, it is worth doing a quick review and update to our mock portfolio. We are moving our copper-long stop level down (as expressed through the $JJC ETF). Yes, the economy is slowing, and yes, Dr. Copper should never be ignored and is screaming pain right now. However, we see the sell-off as overdone tactically and look to hold out a little longer for a bounce-back (or take a greater loss) given our conviction that supply/demand imbalances and future changes from the electrification and digitization of our world make copper a long-term winner. We also see China’s fixed-asset investment increasing as it follows through with more stimulus actions into year-end. We are also increasing our agriculture basket short as expressed through the $DBA ETF to 10% and moving our stop down. We still owe a more thorough examination of that space which will be coming soon.
*Gains in our China equity long, agg basket short, and S&P long have helped offset losses in Yen and copper longs to move the portfolio’s performance to a loss of -4.21%
Econ Data:
New home sales rose 10.7% from a month earlier to a seasonally adjusted annual rate of 696K in May, recovering from a downwardly revised 12% drop in April, which was revised higher to 629K from 591K. The median sales price of new houses sold was $449K, while the average sales price was $511.4K. The seasonally‐adjusted estimate of new houses for sale at the end of May was 444K. This represents a supply of 7.7 months at the current sales rate.
Why it Matters: New home sales bounced back in May, showing housing activity is not completely falling out of bed. Nevertheless, it is likely that consumers will continue to pull back as those with rate locks and prior purchase plans run their course while higher financing coast and continued price appreciation continue to weigh on affordability. Despite the recent pullback in yields these last few days, the average rate on 30-year fixed-rate mortgages rose by 33bps to 5.98% last week, the highest level in some time.
The University of Michigan consumer sentiment was downwardly revised to a record low of 50.0 in June, from a preliminary reading of 50.2. The Current Economic Conditions subindex hit an all-time low of 53.8 (vs. 63.3 in May), and the Expectations subindex fell to 47.5. Consumers across income, age, education, geographic region, political affiliation, stockholding, and homeownership status all posted large declines. Inflation expectations for the year ahead stood at 5.4%, little changed from a preliminary reading or the preceding four months. Meanwhile, the 5-year inflation outlook rose slightly to 3.1% from 3% in the previous month but decreased from its mid-month reading of 3.3%.
Why it Matters: The knife keeps falling for consumer confidence, with consumers about as negative as they have ever been. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009. Inflation continued to be the primary concern, with 47% of consumers blaming inflation for eroding their living standards, just one point shy of the all-time high last reached during the Great Recession. Consumers also expressed the highest level of uncertainty over long-run inflation since 1991, continuing a sharp increase that began in 2021.
*The declines in the overall index and its two supporting subindexes increased in June
*Inflation uncertainty has increased even more than one and five-year expectations, weighing heavily on overall sentiment
The S&P Flash U.S. Composite PMI fell to 51.2 in June from 53.6 in May, the lowest level in five months. The Service PMI fell to 51.6 from 53.4, while the Manufacturing PMI dropped to 52.4 from 57. The overall rise in activity was the second softest month since July 2020, with a slowing in services and the first outright contraction in manufacturing production in two years. Contracting new orders for goods and services in June were the first recorded since May and July 2020, respectively. New export orders contracted significantly too. Backlogs of work across the private sector decreased for the first time in two years. Inflationary pressures, although still elevated, fell the most for input and output prices since the current inflationary pulse started last spring. Manufacturers and service providers alike registered slower increases in employment. Finally, business confidence had one of the largest monthly drops since 2012.
Why it Matters: The coming slowdown is happening quicker than expected as the weight of high inflation and the uncertainty it has brought are increasingly hitting the data, as clearly seen in June’s Flash PMI. The drop in new orders, the backlog of work, and the large decreases in input and output prices suggest that inflationary pressures have peaked as firms and consumers are stepping back, allowing capacity to normalize. This was confirmed by ongoing reports that challenges in hiring or retaining staff remain but weaker client demand and reduced pressure on capacity led to some firms not replacing leavers. Manufacturers and service providers were far less upbeat regarding the outlook for output over the coming year than in May. “The pace of U.S. economic growth has slowed sharply in June, with deteriorating forward-looking indicators setting the scene for an economic contraction in the third quarter. The survey data are consistent with the economy expanding at an annualized rate of less than 1% in June, with the goods-producing sector already in decline and the vast service sector slowing sharply,” said Chris Willaimson, Chief Economist at S&P Global Markets.
*The overall U.S. PMI Composite Index is now back to levels seen five months ago as demand-related sub-indexes fell sharply
*The good news is that the slowdown needed to lower inflationary pressures is happening faster than many anticipated, with manufacturing capacity constraints abating as the backlog of work turned negative
*The services sector saw a fast drop in new orders, and when mosaiced with other data, the consumer is increasingly stepping back from discretionary purchases
Kansas City Fed’s Manufacturing Index decreased to 12 points in June from 23 points in May. The slower pace of factory growth was driven by decreased activity at durable goods plants, especially electrical equipment, transportation equipment, and furniture-related product manufacturing. Sub-indexes for Production, Shipments, New Orders, and Order Backlog moved into negative territory. Employment-related sub-indexes and Supplier Delivery Times fell but remained positive. Inventory sub-indexes rose while Prices Received increased notably and Prices Paid fell slightly. Six-month ahead expectations significantly fell for all categories except prices paid and received.
Why it Matters: There was a significant drop in manufacturing activity in the Tenth District from May’s reading, with the overall index hiding more significant weakness in demand-focused sub-indexes. Individual six-month ahead sub-indexes fell even further than their comparable current ones, showing a growing pessimism as firms increasingly believe a significant economic slowdown is inevitable. This month's special questions were on supply chain disruptions/shortages, the ability to pass through costs, and future expectations. About 60% of firms expected supply chain disruptions and shortages to remain unchanged or worsen in the next six months. Over 55% of firms reported their ability to pass through costs had increased slightly or significantly since the beginning of the year. Interestingly, despite a more pessimistic outlook on future demand, the majority of firms believed they would be able to increase their ability to increase prices in the next six months.
*A very broad negative set of sub-index prints in June, showing a fast deceleration of demand and subsequently outlook
*The majority of firms expect supply chain disruptions to continue or slightly improve
Policy Talk:
Chairman Powell gave his Semiannual Monetary Policy Report to the Congress this week, speaking to the Senate and House Banking Committees. There was little new information conveyed in Powell’s short prepared remarks and the Q&A over the two days coming across as hawkish, but less so than expected. Essential sticking to script and repeating comments made following the June FOMC meeting, Powell did not mention an “unconditional” commitment to bring inflation down, implying a readiness to accept higher unemployment as many expected. He prioritized the message that the Fed is committed to returning inflation to 2%, making ongoing rate hikes appropriate. Still, he stressed the pace of the hikes would be dependent on the incoming data. He put some weight back on core PCE rather than headline CPI or rising inflation expectations as guiding the Fed’s policymaking. Powell again stated that a sustainable, strong job market depended on bringing inflation down. He highlighted that events out of the Fed’s control have made their job more difficult. When questioned by Senator Warren, he noted that higher rates wouldn’t bring down food and energy prices but outlined three channels (interest rate sensitive spending, wealth effect, and exchange rate) in which a tighter policy would generally reduce demand and inflation. When answering questions from Senator Shelby, Powell noted the market is reading the Fed’s reaction function “pretty well,” indicating that another 75 bp hike was likely in July. Finally, there was a pattern of questioning emerging between Democrats and Republicans. Democrats tended to argue that inflation was driven by factors outside the Fed's control (supply shocks), and hence supporting the labor markets was more important than fighting inflation. Republicans took the other side, calling for a more purest/rule-based approach to monetary policy and the need to bring inflation down quickly. Finally, Powell again confirmed that losses on holdings in the portfolio would have no impact on policy, specifically answering a question about MBS sales expectations.
*You think you're having a bad day
Governor Bowman gave prepared remarks yesterday at a conference hosted by the Massachusetts Banker Association on her outlook for policy and the economy. She immediately dived into the high level of inflation, attributing the tightness in labor markets as a contributing factor. She stated that after slowing for a short time, inflation has picked up again, especially in food and energy, primarily due to the situation in Ukraine. This has put pressure on inflation expectations, stating that moves higher make the Fed’s job increasingly more challenging. As with Powell, she cites the rise in inflation expectations seen in the University of Michigan’s survey. She highlights the loss of real wages despite the tight labor market, meaning labor is still losing purchasing power. She is also worried that labor force participation will not return to pre-pandemic levels. Bowman then lays out her policy views, supporting an additional 75bp hike in July and subsequent 50bp hikes in following meetings. She concludes by acknowledging the risks that come with the aggressive tightening path underway, prioritizing price stability to ensure a stronger longer-term labor market. Interestingly she favors a faster approach to selling the Fed’s MBS holdings.
“As we see surveys like the Michigan survey report higher longer-term inflation expectations, we need to pay close attention and continue to use our tools to address inflation before these indicators rise further or expectations of higher inflation become entrenched.”
I strongly supported the FOMC's decision last week, and I expect to support additional rate increases until we see significant progress toward bringing inflation down. Based on current inflation readings, I expect that an additional rate increase of 75 basis points will be appropriate at our next meeting, as well as increases of at least 50 basis points in the next few subsequent meetings, as long as the incoming data support them
“Since the longer-term goal of the balance sheet reduction plan includes a Treasuries-only balance sheet, it would make sense to eventually incorporate MBS sales into the plan so that reaching this goal does not take too long. My longer-term goal would be to get the Fed out of the business of indirectly intervening in the real estate market.”
Richmond Fed President Tom Barkin gave prepared remarks Wednesday to the Richmond Chapter of the Risk Management Association regarding his outlook on the economy and policy. He started his speech by highlighting that the most common question he receives is, “will inflation return to normal?” This question was usually followed by: “Are we heading into a recession?” He commented that Fed has the tools to lower inflation back to target and is committed to doing so, as seen in the recent rate hikes. He highlighted low levels of business and consumer confidence and the 2-10 yield curve inverting as signs that a recession is possible. However, following Mester’s example, he stated consumer spending has been strong and household and bank balance sheets look healthy. The Q1 negative GDP print was not worrying due to its technical nature, and the strong jobs market would buffer any overly negative effects from policy tightening while still reigning in demand enough to bring down inflation. Generally, he believes monetary policy will likely need to move into territory that restricts growth, but he isn’t sure what the level is yet and sees the economy as being able to take it. Mr. Barkin isn’t currently a voting member of the FOMC.
“I see rising rates stabilizing any drift in inflation expectations and, in so doing, increasing real interest rates and quieting demand. Companies will slow down their hiring. Revenge spending will settle. Savings will be held a little tighter. At the same time, supply chains will ease; you have to believe chips will get back into cars at some point. That means inflation should come down over time — but it will take time.”
“The Fed is on a path to returning inflation back to normal levels. We have the credibility with households, businesses, and markets required to deliver that outcome. We may or may not get help from global events and supply chains. There is, of course, recession risk along the way, but there’s also the prospect of the economy returning closer to normal.”
Technicals and Charts:
Four Key Macro House Charts:
Growth/Value Ratio: Growth is higher on the week, but the ratio is little changed on the day. Mid-Cap Value is the best performing size/factor on the day
Chinese Iron Ore Future Price: Iron Ore futures are lower on the day and on the week. China will ban new steel and coking operations as well as other heavy industry projects in key zones to achieve carbon reduction goals
5yr-30yr Treasury Spread: The curve is steeper on the day and the week, with the long-end given back some of their recent gains while inline/improved inflation expectations helped keep two-year yields more contained
EUR/JPY FX Cross: The Euro is higher on the day and week as the BoJ remains mute on plans to act despite inflation now above target
Other Charts:
Earnings Estimates look to be still too high, meaning the more historical P/E ratio for the S&P may not correctly reflect the coming lower E.
When sentiment is this bearish, you are supposed to start buying, and it looks like some are starting to again but...
Retail traders have reduced their exposure to single-name stocks and options quickly, although both are still at levels above pre-pandemic averages…
Institutional asset managers have also reduced exposure more than they historically would, given where the U.S. manufacturing ISM is.
Evercore ISI attributes record levels of stimulus, “snarled” global supply chains, and a tight labor market as the primary drivers of inflation. The good thing is, as we see it, all three of those things are changing, leading to reduced inflationary pressures
“LEI from @Conferenceboard dipped by 0.4% in May and has now contracted for three consecutive months, which hasn’t happened since the COVID recession” - @LizAnnSonders
“The US consumer is not healthy or happy. Many are tapping into credit card and home equity lines of credit to sustain their spending capability. Unfortunately, spending trends are focused on staples as consumers are barely keeping their heads above water as inflation surges.” - @Mayhem4Markets
According to Federal Reserve data, the wealthiest 1% of Americans held almost half of all corporate equities and mutual fund shares in the first quarter of 2022, with the bottom 20% holding most of their wealth in real estate. As the Fed increasingly weighs the effect of its tighter policy, it's important to think about the wealth effect channels, especially if real estate prices begin to fall next year. This means tighter FCI weighing on equities is different from higher rate levels hurting real estate.
Traffic levels across China are returning to a more normal level, with Beijing and Shanghai ticking back to pre-lockdown levels quickly in June…
However, according to the World Economics SMI report, business activity was still contracting in June
It looks increasingly unlikely China’s GDP growth for the year will be anywhere near the target, increasing our belief that a continued broad stimulus pulse will be maintained throughout the rest of the year
Article by Macro Themes:
Medium-term Themes:
China Macroprudential and Political Loosening:
Personnel is Policy: Russia hand's demotion signals shift in Xi's strategy - NikkeiAsia
The demotion of Le Yucheng, China's first vice foreign minister, has sent shock waves through national political circles as it meant the pro-Russian diplomat was no longer the frontrunner in the race to become the head foreign minister. Le was the architect of the now-famous summit between Xi and Putin in February and stated, "there is no ceiling on China-Russia relations” afterward. His analysis has not aged well. Le's pro-Russia stance seemed to fit China's recent "wolf warrior diplomacy," which doesn't hesitate to confront the West. But like it or not, the reality for China is that its top diplomatic relationship is with the U.S. and Europe.
Why it Matters:
It is noteworthy that Xi has allowed the benching of a figure who held the key to his relationship with Putin and diplomacy toward Russia. Le, the Russia specialist, should have been able to at least sense Putin's intent to invade Ukraine sooner or later and warned Xi about the risks involved with expressing closer ties right before the invasion. Interestingly, the day before it was announced, China's top diplomat, Yang Jiechi, a politburo member, talked with U.S. national security adviser Jake Sullivan for four and a half hours in Luxembourg. We highlight this development not as a pivot by China away from Russia but simply as an interesting development in Beijing’s stance and need to court both Russia and the West for its own needs.
Longer-term Themes:
Electrification and Digitalization Policy:
Tracking ID: Lawmakers Want FTC to Investigate Apple, Google Over Mobile Tracking – WSJ
Four Democratic lawmakers called on the Federal Trade Commission to investigate Apple and Google, alleging the companies engage in unfair and deceptive practices by enabling the collection and sale of mobile-phone users’ personal information. The complaint is focused on the difficulty users have in turning off ad tracking, “These identifiers have fueled the unregulated data broker market by creating a single piece of information linked to a device that data brokers and their customers can use to link to other data about consumers,” the letter written by legislators said.
Why it Matters:
These identifiers are ostensibly anonymous but can be easily traced back to the individuals who own the phones associated with them. “It is often possible to easily identify a particular consumer in a dataset of ‘anonymous’ location records by looking to see where they sleep at night,” the letter stated.“The FTC should investigate Apple and Google’s role in transforming online advertising into an intense system of surveillance that incentivizes and facilitates the unrestrained collection and constant sale of Americans’ personal data,” further stated. Given the negative effects on Q1 earnings that already occurred for specific technology companies involved in digital advertisements, any further changes are worth monitoring.
Weaponized IT: Russia Increased Cyber Espionage Against Countries Supporting Ukraine, Microsoft Says – WSJ
Russian intelligence agencies have increased the pace of cyberattacks against nations that have provided aid to Ukraine, according to new research published Wednesday by Microsoft Corp., which said it had observed Moscow-backed hacking attempts in over 40 countries. Much of the malicious cyber activity linked to the Kremlin took aim at governments that are part of the North Atlantic Treaty Organization for espionage, and targets also included nongovernmental organizations, think tanks, and humanitarian groups providing support to Ukrainian refugees, as well as information technology and energy firms, Microsoft said.
Why it Matters:
Since the war began on Feb. 24, Microsoft said it had detected Russian network intrusion efforts on 128 targets in 42 countries outside Ukraine, which cyber firms and the Ukrainian government have said has also suffered a regular onslaught of Russian cyberattacks. Many of the alleged Russian attacks were unsuccessful and smaller in scale than what many experts initially anticipated. Microsoft said in April that half a dozen hacking groups linked to the Russian government had attempted hundreds of cyberattacks in Ukraine since Russia’s invasion, including dozens intended to destroy computer systems. However, the larger takeaway may be that the West overestimated Russia’s cyber abilities just like it overestimated it on the ground military capabilities. Or maybe more is coming.
Consequences: Research questions potentially dangerous implications of Ukraine's IT Army - CyberScoop
The European Union and NATO are not fully grappling with the potential consequences of Ukraine’s IT Army, a volunteer group that executes cyberattacks on Russian targets, a Center for Security Studies researcher argued Wednesday. Taken together, the conduct of “both Kyiv and the Ukrainian IT community at large … has collapsed entire pillars of existing legal frameworks regarding norms and rules for state behavior in cyberspace and has taken apart the illusion of separating the defense of Ukraine from Ukrainian companies and citizens living abroad.”
Why it Matters:
The IT Army emerged in the days after Russia launched its military assault on Ukraine, as the country’s government and private sector cybersecurity officials called on volunteers to help in any way they could. In the months since the effort has been active, its Telegram channel has listed at least 662 Russian targets for potential DDoS attacks while also carrying out non-public attacks that show at least some coordination or cooperation with intelligence services. We highlight this development as it changes a nation's cyber defense strategy to one that is more aligned with a global community's moral viewpoint and desire to punish bad actors.
Commodity Super Cycle Green.0:
Let it Grow: Fertilizer Stockpiles Swell as Farmers Shun High Prices, Easing Harvest Worries - Bloomberg
Crops across the world are dependent on nutrients from Russia, one of the biggest exporters, and the invasion of Ukraine four months ago roiled markets for the crucial chemicals. Ultimately, prices soared so high that farmers halted buying, and now the market has flipped. Fertilizer supplies are piling up from Florida to South America. Ships are waiting to unload, and companies are struggling to reduce stocks in ports and warehouses, according to people familiar with the matter.
Why it Matters:
The concerns that fertilizer supplies from Russia would be completely shut off haven’t panned out. Russian fertilizer sales are exempt from the sanctions imposed by U.S. and E.U., and some shipments are entering the U.S., according to cargo data tracked by Bloomberg. We highlight this development under our “Green Commodities” theme, given the effect higher energy and food costs have on biofuels, with the first increasing use and the latter not. The slide in fertilizer prices, if it continues, may ease some of the concerns that farmers would skip applications of synthetic nutrients to save money, reducing crop yields and worsening food inflation as well as biofuel availability.
No Knowhow: Nuclear Power Is Poised for a Comeback. The Problem Is Building the Reactors – WSJ
Governments want nuclear energy’s carbon-free electricity to help tackle climate change and reduce dependence on Russian oil and gas. Such ambitions face a major obstacle in the West. The nations that gave birth to the nuclear age are short on managers and skilled workers with experience in building reactors after shunning nuclear energy for years. A handful of plants already under construction across the U.S. and Europe are years late and billions over budget. The projects have left companies insolvent and exposed weaknesses in U.S. and European nuclear engineering capabilities.
Why it Matters:
The U.S., France, and China are backing a new generation of reactors that are intended to be easier to build and safer than earlier designs. The new reactor designs also aim to produce less waste by using uranium more efficiently than existing reactors. However, regulators haven’t approved the designs for these advanced reactors. They will also require large numbers of highly-skilled nuclear workers and the development of a new kind of nuclear fuel known as high-assay low-enriched uranium, which has never been used commercially. If approved and constructed at a large enough scale, these new reactors may make the goal of having more nuclear possible, with the International Energy Agency saying global nuclear power capacity will have to double by 2050 for the world to reach so-called net-zero.
Current Macro Theme Summaries:
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