Consumer Buying Prices

Before getting into Market Insights, I want to congratulate President Trump and his team for stopping the Gaza war. For years many have tried to end the violence, but efforts have always fallen short. Now, there’s finally a glimmer of hope. President Trump’s unorthodox approach has worked. He is the first President to reach out and talk to Hamas. His team was able to get Israel, Hamas, Saudi Arabia, Dubai, Egypt, United Arab Emirates, Turkey and other Middle East countries to agree on his 20 Point Peace Plan. There is a cease fire in place, and hostages have been returned home. Hallelujah! This is truly a miracle. Now that we have a peace plan in place, the difficult negotiations will begin. Negotiating without bullets flying is the preferred method. Let's pray that it works.

On October 9th, China severely restricted the export of rare earth minerals and their products to the United States. China supplies the U.S. with 90% of its rare earth minerals, which are essential for enabling electric-car motors, wind turbines, and military systems. The greater issue, however, is that it threatens the supply chain for semiconductors. These chips are the lifeblood of the economy, powering phones, computers and data centers needed to train artificial-intelligence models. China said it would give particular scrutiny to the export of the restricted items if they are intended to help build advanced chips or support artificial-intelligence research. Unsurprisingly, on October 10th Trump announced 100% tariffs on Chinese goods set to begin November 1st.  

While China holds leverage through its control of rare earth minerals, the U.S. maintains leverage of its own through its production of the advanced chips essential for artificial intelligence and high-tech industrial products such as jet engines. The U.S. restricts the sale of advanced chips from companies like Nvidia and other semiconductor manufacturers that are critical to China’s technological progress and cannot be produced domestically. Meanwhile, the U.S. has begun developing its own rare earth mineral mining operations, but it will take years and billions of dollars to get up to speed.

So, what is this all really about? The answer is simple: ARTIFICIAL INTELLIGENCE. I often turn to AI for help with my research on topics I want to understand more deeply. So, I asked claude.ai:

What are the most important impacts AI will provide in the next 5 years?

In less than a minute I had this:

Healthcare Breakthroughs. AI will accelerate drug discovery, cutting development time from years to months. Diagnostic AI will detect diseases earlier and more accurately, while personalized medicine will become mainstream as AI analyzes individual genetic profiles to tailor treatments.

WOW! This was followed by more detailed answers for Scientific Research Acceleration, Workplace Transformation, Education Personalization, Climate and Energy Solutions, and Creative Industries Evolution. Is it any wonder why trillions of dollars are being invested in this?

I asked ChatGPT the same question, and I got a similar but much longer answer. I like keeping things simple, so I’ll save you the details.

Why is AI development so critical? Experts believe that China is trying to gain control of the technology that would potentially let them catch up in the AI race and upend the world order. “It’s an economic equivalent of nuclear war - an intent to destroy the American AI industry,” said Dmitri Alperovitch, co-founder of the Silverado Policy Accelerator think tank. AI is just as critical in military dominance.

After April 2nd Liberation Day and the first round of tariffs, the U.S. and China began their negotiations. The most significant outcome was an agreement reached in early June allowing limited shipments of rare earth minerals and related products. The agreement was intended to remain in effect through mid-November.

With the events of October 9th and 10th, we’ve returned to a familiar place - much like where we stood six months ago. The back-and-forth of tariff threats and countermeasures will continue. Negotiations will resume, compromises will be made, and eventually, both countries will claim victory before moving on.

The government shut down on October 1st, with each party blaming the other for the gridlock. The last time this happened was during the 35-day closure of 2018 – 2019, under President Trump’s first term, which stemmed from a dispute over expanding barriers along the U.S.–Mexico border.

One of the many agencies impacted by the shutdown is the Bureau of Labor Statistics, which reports on employment and inflation. Because of this, the CPI report will be released on October 24th, not October 15th as originally scheduled. The release of my Market Insights typically coincides with this, but there is still enough to report on.

How long will the government shutdown last? Members of Congress know how to talk but not how to listen. I know this because they never seem to answer the questions they are asked. This stalemate has become more about assigning blame than accepting responsibility. Permanent layoffs of civil servants are already underway, and both government employees and military personnel are left wondering whether they’ll get paid. Shouldn’t members of Congress face the same uncertainty? Maybe even a few permanent layoffs of their own? Whoops, I can get cynical sometimes.

INFLATION

CPI delayed my shutdown

• The Consumer Price Index (CPI) for September will not be reported until October 24th due to the shutdown.

• Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, for August was 0.3% month over month and is 2.7% year over year. Core prices (which exclude food and energy) were 0.2% in August, the same as July at 2.9% on an annual basis. Consumer spending was 0.6% versus 0.5% the previous month.

• The Producer Price Index for August fell 0.1% after rising 0.9% in July, an unexpected surprise and the first drop in four months. Prices are up 2.6% on an annual basis versus 3.4% annualized in July. Core prices, excluding food and energy, fell 0.1%. This is positive news on the inflation front.

MANUFACTURING

Indicators mixed and manufacturing tepid

• The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) rose in September to 49.1 from 48.6 in August and has been in contraction for more than two years now. New orders fell to 48.9 from 51.4. Production rose to 51 from 47.8. The prices paid index fell again to 61.9 from 63.7, its lowest level in seven months. The backlog of orders was down 2.1 at 44.7, and the employment index rose to 45.3 from 43.8.

• PMI also reports that only Miscellaneous Manufacturing, Fabricated Metal Products and Primary Metals grew in September. These other metal related industries remained in contraction: Computer and Electronic Products; Transportation Equipment; Electrical Equipment, Appliances and Components.

• The ISM said that in September both the service and manufacturing sectors continued to shed jobs, though notably at a slower rate than in August. The ISM also reported that roughly 64% of manufacturers, which have been walloped by tariffs, said that "managing head count is still the norm at their companies, as opposed to hiring."

• Revised GDP growth in Q2 was better than expected and up 3.8% on an annual rate. Q1 was down 0.5% due to front loading on the excepted tariff increases. The details improved with stronger consumer spending (services), business investment (equipment, software, and structures), and government purchases more than offsetting weaker readings on inventories, trade, and housing. Core GDP is a better gauge of sustainable growth, including consumer spending, business fixed investment, and home building—while excluding the more volatile categories like government, inventories, and trade. Core GDP grew at a 2.9% annual rate in Q2, far above the prior 1.9% estimate.

• U.S. non-defense capital goods new orders, excluding aircraft, rose 0.4% in August. It was led by machinery (+1.3%), fabricated metal products (+0.7%), and primary metals (+0.1%), while electrical equipment (-0.2%) and computers and electronic products (-0.1%) declined.

• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, fell 0.3% in August after a robust 0.6% increase in July. If unchanged in September, these orders would be up at a 3.1% annualized rate in Q3 versus the Q2 average.

• Another nice surprise was new home sales for August. They were up 15.4% posting the largest monthly gain since 2022. While the August pace remains below the highs of the pandemic, sales today broke above pre-pandemic levels which had been a ceiling of sorts for activity the past couple of years. First, financing costs have been trending lower, with the average 30-yr fixed mortgage rate now around 6.3%, the lowest since 2023. With the Federal Reserve restarting rate cuts last week, buyers have reasons for further optimism. Meanwhile, prices have been trending lower for new builds the past several years. Median sales prices are down 10.2% from the peak in October 2022. We will see if the trend continues.

• Car and light truck sales in September continue to be steady at 16.3 million annual rate. Some of the factors cited were a strong stock market and increased electric vehicle sales before federal tax credits expire at month's end.

• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our nine locations and a diverse industrial base. Based on our twelve-month trailing average, volumes for September were flat.

CHINA

China's plan to be the next superpower

China’s fifteenth plenum - a full meeting of the Communist Party’s Central Committee - will take place October 20th through the 22nd. The Central Committee includes about 370 members and convenes every five years to review the country’s Five-Year Plan, a blueprint for China’s economic and social development. This year’s plan, covering 2026 through 2030, is being personally driven by President Xi Jinping.

The last five-year plan placed a lot of emphasis on high quality growth in the technology sector, while also calling for stronger domestic demand. China has succeeded with technology growth. Electric vehicles, robotics and electronics manufacturing and exporting have surged. However, internal growth hasn’t followed. They continue to cut costs through government support and undercut prices in export markets to stay competitive. It’s a strategy that works for now, but the plan has its limits.

Housing is still a bust. Employment is weak, and a falling population has slowed their domestic economy. The aging population gets little social security from the government. On their economic side, analysts think the focus will be three issues: AI, AI, and AI.

Official PMI is still in contraction but rose 0.4 in September to 49.8 from August. The Caixin rose in September to 51.2 from 50.5 in August.

China has made no secret of its ambitions. The nation intends to position itself as the world’s dominant superpower for the next century, and to reshape the existing global order in the process.

METALS

Tariff uncertainties reign (pun intended)

The Midwest Premium is in the upper 70’s now. Traders believe it is getting close to attracting metal from Canada because of the 50% tariffs that went into effect in July. This has caused the downstream manufactures of aluminum products to suffer. Those most negatively impacted have been the auto industry, aerospace, packaging, and electronic/electrical industries.  

On October 8th, Canadian Prime Minister Carney met with President Trump. This meeting went better than the previous ones. They were both smiling and talking about improving our trading relationship. Canada's exports to the U.S. have fallen significantly, leading to a record trade deficit. Automotive has been hurt with plants being shut down and unemployment is on the rise. Canada needs to make a deal, and Trump said they would be working on this.

The Midwest Premiums December futures markets immediately fell 9 cents. The question is when will there be a change in the tariff and how much will it be? The speculation is that at best it will be a 25% tariff. Will it be applied to the other exporters of prime to the U.S.? We don’t know, but once you get a deal, most other countries will figure out what they need to do to also get one. The lower tariffs will greatly help all U.S. manufacturers and not just the few U.S. primary aluminum producers who produce very high cost “liquid electricity.”

While prime aluminum has touched over $2.00 a pound, the U.S. keeps attracting scrap aluminum. Since July 1st, prime aluminum has gone up close to 20%, while prime aluminum scrap has been virtually unchanged to down 7%. Secondary aluminum scrap has also remained virtually unchanged.  
Copper prices were up 5% at the start of the month. Shortly after, the Freeport Indonesia Grasberg copper mine accident shut down production. Since then, the news on the mine production has only gotten worse, and copper prices have risen 10%. The steel market for October is down $20 a ton. Stainless steel prices remain unchanged.

CLOSING

I almost got through this without mentioning my favorite acronym. It doesn’t matter whether we are discussing economics, politics, families, or sports. Life will always be full of VUCA: Volatility, Uncertainty, Complexity, and Ambiguity. Despite all the VUCA, the stock markets - not the real economy - keep climbing. Good news for investors, but every rally meets its reckoning. What goes up must come down.

"Artificial intelligence will be the most transformative technology of the 21st century. It will affect every industry and aspect of our lives." — Jensen Huang, CEO of Nvidia 

“The development of AI could also be humanity's last achievement if risks are not managed.” — Stephen Hawking