Shapiro – October 2023 Market Insights

Currently the Fed has been able to substantially reduce inflation without causing a recession. The Fed is steadfast in holding on to higher interest rates for longer. Their strategy is to keep the economy growing, but not too fast, and to avoid a recession. GDP is forecasted to be 4% in Q3. They have also accomplished this while keeping unemployment below 4%. Over the last three months inflation as measured by the Feds preferred inflation index PCE, has been 2.2% and close to the 2% goal. This growth with lower inflation, high employment, and a growing economy, has been an amazing accomplishment.

Monetary policy has “long and variable lags” and the average length of time between the start of a Fed tightening cycle and the start of a recession is around twenty-two months. That timetable places the start of the recession into early next year, maybe as soon as January. Currently, the long-term interest rates on government bonds are approaching 5%, which hasn’t been seen since 2007. And the 30-year fixed mortgage rate is closing in on 8% for the first time since 2000. The Fed forecasts interest rates will remain around 5% through 2024 and then lower in 2025 to 2026. If this continues, it will certainly slow both the economy and inflation.

Other economic negative factors continue to build:

• The pandemic distribution and savings have almost evaporated.
• Student loan payments are coming due after a three-year hiatus.
• Government bond interest rates continue to rise significantly.
• The effects and damage a government shutdown will cause.

David Ramsey, a conservative financial advisor, said “almost all long-term thinking has short-term pain” and achieving a soft landing will not be a smooth ride. It is always VUCA, Volatility, Uncertainty, Complexity and Ambiguity. Volatility will come in the form of frequent climate change shocks and emergencies, energy spikes, political crises, wars both ongoing or threatening [I wrote this prior to Hamas terrorists attacking innocent citizens in Israel], or even another pandemic.

Last month 90% of the forecasters touted an October kind of frightening and enduring government shutdown starting to begin the month. It was avoided because of bipartisan support that caused House Speaker Kevin McCarthy to lose his job. I always thought bipartisanship was a good thing. While we know that bipartisanship works best for our country, we haven’t seen that luxury happen in a long time. I wonder who these slow-moving Zombie representatives are representative of? Maybe just themselves? Now the shutdown date is November 17th. Without a Speaker of the House, the odds of a shutdown are 99% and I bet a wager they are collecting on in Vegas. In the meantime, I will continue to focus on the economic data to analyze where we are heading. It will be interesting to see how the Haunted House of Representatives will trick or treat us on November 17th.

• Consumer Price Index (CPI),rose 0.4% in September down 0.2% from August due to the lower energy prices. It is now 3.7% from a year earlier. The core CPI, excluding food and energy, rose 0.3% the same as August and down 0.2% for on a prior year basis to 4.1%. With inflation moving lower and government bonds moving higher, the Fed may not have to raise their rates again this year.
• The Producer Price Index increased 0.5% in September down from 0.7% in August. Excluding energy and food, the core was up 0.3% in September from 0.2% in July and are up 2.7% in the past year. However over the past 3 months, core inflation was up at a 4.5% annualized rate.
• Personal Consumption Expenditures (PCE) is the Fed’s preferred inflation measure and is reported at the end of every month for the prior month. The August report using the PCE measures shows inflation is getting close to 2% on a short-term basis. Super Core Inflation includes services (think entertainment, healthcare, and haircuts) and excludes food, energy, and housing which is what the Fed focuses on.  Super Core rose only 0.1% in August and is up 4.4% versus a year ago but down from a month ago and down 0.8% from its 5.2% peak in October 2022. Core inflation rose only 0.1% last month, the lowest since November 2020. Over the last three months, it has risen at an annualized rate of 2.2%, not far from the Fed’s 2% inflation target of .0.2%.
• Employers added 336,000 jobs in September while the job openings fell but they are still very strong.  The unemployment rate was unchanged at 3.8%. Average hourly earnings rose only 0.2%, and over the last three months and have risen at a 3.4% annual rate. Those numbers point away from any upward spiral in wages and inflation and are consistent with the Fed’s 2% inflation target.

The ISM, Institute for Supply Management, Manufacturing Index for September improved by 1.8 to 49 and remained in contraction for the eleventh consecutive month but is consistently improving. Anything below 50 is in contraction. The New Orders Index rose 2.4 to 49.2 percent while the Backlog of Orders fell 1.7 to 42.4. The Production Index rose 2.5 to 52.5 and the Prices Index fell 4.6 to 43.8.

• Orders for core capital goods (excluding aircraft and transportation), which will lead to shipments in the future, rose a healthy 0.4% in August after 0.5% gains in July and 0.6% gains in June. In the past year, orders for durable goods are up 3.8%, while orders excluding transportation are up a modest 1.1%.
• Shipments of “core” non-defense capital goods ex-aircraft (an essential input for business investment in calculating GDP and a leading manufacturer indicator) rebounded to up 0.7% after falling 0.2% in July.
• Housing is growing weaker with new home prices increasing along with higher mortgage rates. New home sales fell in August and housing starts were down 11.3%.
• Industrial production rose again in August to 0.4% after being up 0.5% in July.
• US Nonresidential Construction spending continued to grow in August and is at a new high. During the first eight months of this year, construction spending is 4.2 percent higher than for the same period in 2022.
• New light-vehicle sales in September were about the same as August and are at a 15.7 million annualized sales rate. This is despite the higher prices of cars and borrowing costs.
• The Shapiro Nonferrous Scrap Activity Index, which tracks our daily purchases from the same accounts across our ten locations and a diverse industrial base, rose 6% from August and was 2% above our twelve-month trailing average.

The domestic growth dynamics are tepid. Real estate, 30% of their economy, is imploding. It took the US over ten years to pull out of the real estate Great Recession. Their real estate problems are much worse. Consumer confidence continues to fall. With an aging population, the demographics are bad. Foreign investors have sharply reduced their investments because of strict regulations that keep changing. And the Chinese government seems to lack a clear strategy or the initiative to improve.

Despite this, China’s official PMI manufacturing index in September rose slightly into expansion to 50.2, while its private sector Caixin dropped slightly to 50.6 and the service sector fell to 50.2. These are surprisingly positive numbers.

Edward Meir of Marex points out that metals consumption remains strong in China despite the housing sector. He references the strength in the EV and battery sectors, the solar industry, chip production, wind turbines, power cables and grid installations.

Our government has been concerned about the Chinese advances in semiconductor manufacturing and design that have resulted in a significant technology improvement. Our country acted to pass the CHIPS and Science Act designed to boost US investment in high-tech research and to bring semiconductor manufacturing back to the United States.

The EU is still suffering from the Putin war.  Their growth rate keeps falling and will be under 1% for this year. Inflation is falling in Europe. In the 20 countries that use the euro, consumer prices were up 4.3% in September, compared to a year earlier. That figure was 5.2% in August.

As you know, the UAW strike will affect car production and the supply chain. The dollar is stronger and usually has an inverse relationship with metals. After oil prices spiked in September, they were down 11% last week. With housing slow, the aluminum billet demand is weak. China’s primary aluminum production is near its peak, and they have imported considerable Russian metal at a discount.  They have also increased exports of primary metal in the past three months, but the imports far outweigh this. For the year, CRU expects a net import of about one million tons of primary into China. Surprisingly, inventories remain low. Add this all together and the prices are flat to dull.

Aluminum scrap prices are very close to the same as they have been since July.  The same is true for copper and stainless steel. Even with the partial automotive strike, ferrous scrap prices will be about the same as September and down 10% from July and August. However, US HRC prices are now hovering at a ten-month low of $32.50/cwt, while US rebar prices are at two-year lows.

At the end of the day, I feel good about the economy, but we are still facing my favorite acronym, VUCA – volatility, uncertainty, complexity and ambiguity. Always interested in your thoughts too.

It is a new segment I’ve added at the end of each month’s Market Insights. It aligns with Shapiro’s purpose of Making the Planet Better Together. Shapiro has launched Circular by Shapiro (circularasaservice.com) to provide the environmental metrics and data needed to reach sustainability goals.

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