CONSUMER BUYING PRICES

The best explanation of the government shutdown comes from Edward Meir of Marex. “These shutdowns are truly a bizarre spectacle, unique only to the U.S., where the government basically closes up shop if Republicans and Democrats find themselves at loggerheads over spending provisions and decide that the best way to prevail over the other side is to inflict maximum damage on the public.” I highly recommend Edward’s daily and monthly insights.

The U.S. and China trade wars have followed familiar patterns and strategies respectively.

The Trump pattern:

• Threaten countries with higher tariffs
• Retreat from high tariffs to make a deal
• Celebrate the “greatest deal ever”

The Chinese strategy:

• Threaten to stop shipments of magnets and rare earth minerals
• Extend the current shipments of magnets for future commitments
• Pretend to meet the commitments

The already high tariffs with the threat of going even higher have hurt the Chinese economy, but China continues to expand its exports to the rest of the world and to export goods it would have shipped directly to the U.S. through Viet Nam. In the long run, it is a minor inconvenience. What China really wants are the most powerful advanced semiconductors from Nvidia and the equipment to make them. Those chips are critical to China’s goal of dominance in its AI and military superiority. The U.S. has not agreed to do this.

The U.S. has asked for increased purchases of soybeans, a reduction in fentanyl shipments, and access to rare earth minerals and magnets. The first two are easily accomplished. However, China controls 90% of the world's supply of rare earth minerals and the production of magnets. That is the choking point for the United States. We need them for production of cars, electronics, and in the defense industry for the manufacturing of advanced planes and weapons.

China has also threatened the rest of the world with the reduced supply of rare earth minerals and magnets. These threats are prompting countries to diversify their supply chains and reduce their reliance on China. Threatening customers, vendors, friends, neighbors, and countries never ends well. Trump’s high tariffs have had the same effect on our allies. Once you break the trust with your long-term partners by threatening them with tariffs, they will always look for an alternative. Will Canada and other countries ever trust the U.S. again? I don’t think so.

The U.S. and China have once again retreated and delayed a trade war with minor concessions on both sides. China has agreed to extend the current supply of magnets and rare earth minerals through November 26th, 2026. The date is significant because it will be after the mid-term elections. China will wait for the results and make their decisions accordingly.

The final part of the China strategy is to pretend they will honor their commitments. For example, China has made an agreement to buy nominal amounts of soybeans from the United States. Since Trump started threatening and tariffing soybeans during his first term, China has found other sources from which to buy them. Brazil, Argentina and other countries are now the principal soybean suppliers to China, and our farmers are left to struggle.

In 2020, during President Donald Trump’s first term, he signed and celebrated what he called a "historical trade deal." China agreed and committed to purchase $200 billion of additional U.S. exports before December 31st, 2021. The reality is they bought zero, zilch, nada, none. China has that “pretend” thing down really well.

Tariffs

"Tariffs affect the costs and profits of businesses and, to the degree that they raise prices, also affect the real disposable income of consumers. Some businesses will be directly affected by tariffs, but many more will be affected by how tariffs crimp household spending." This quote is from Christopher Waller, Federal Reserve Board of Governors, appointed by Donald Trump in 2020.

Levying tariffs and taxes is officially the domain of Congress. Previous administrations mostly adjusted tariff policy by negotiating comprehensive trade deals that needed Congressional approval. Not Trump.

Even if the Supreme Court rules against the tariffs, which looks like a strong possibility, Trump will likely attempt to find other ways to get around the ruling. One such way is Section 232 based on national security grounds, which he has already used earlier this year on steel and primary aluminum. He has also used executive authority to issue tariffs and seal trade pact deals for his administration to bypass Congress entirely.

My surprise so far from the tariff effects is that the U.S. economy has proved far more resilient than I expected. Tariffs and inflation have not been as damaging as predicted. It all depends on the Supreme Court ruling which will not be announced until January.

If Trump had not enacted his tariffs, our economy’s growth (GDP) would have been much stronger than it is now, and businesses could move from the depths of uncertainty to a more predictable climate. When will Trump finally realize that businesses and Americans don’t want tariffs? At what point does Trump learn that it hurts him and the Republicans?

Instead, we continue to have VUCA: Volatility, Uncertainty, Complexity, and Ambiguity.

INFLATION

Data fog because of government shutdown

• The Consumer Price Index (CPI) was not available due to government shutdown. Data fog.
• Core inflation for October was not available due to the government shutdown. Data fog.
• Personal Consumption Expenditures (PCE). Data fog.
• The Producer Price Index. Data fog.

MANUFACTURING

Still some data fog in manufacturing

• The Institute of Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) fell in October to 48.7 from 49.1 and has been in contraction for more than two years now.
• New Orders, New Export Orders, Backlog of Orders, and Customers’ Inventories indexes improved, but are still in contraction territory.
• Metal manufacturing industries that reported growth were Primary Metals; Transportation Equipment; and Fabricated Metal Products. The ones that contracted were Electrical Equipment, Appliances & Components; Machinery; and Computer & Electronic Products.
• The ISM Services Index, which is the business activity index, rebounded from contraction territory last month at 49.9 and rose to 54.3 in October. It is responsible for two-thirds of U.S. output and once again demonstrated its strength.
• The index beat even the most optimistic forecast of any economics group polled by Bloomberg and rose to an eight-month high of 52.4 in October. Looking at the details, the pickup in the headline index came from a big jump in the new orders index, where growth accelerated to the fastest pace in a year. And I thought that the economy was suffering.
• U.S. non-defense capital goods new orders, excluding aircraft. Data fog.
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator. Data fog.
• Car and light truck sales in October decreased 6.5% to a seasonally adjusted annualized rate of 15.3 million units last month. This was expected as tax credits for EV’s were dropped. EV sales dropped to 74,897 units from 98,289 units in September. The government was also shut down.
• 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 October were flat.

CHINA

“You should live in interesting times.” An old Chinese proverb and curse.

China completed its 15th Plenum Five-Year Plan and it won’t be out officially for months. Much of the plan will focus on how China will compete with the United States. The assumptions are that there will be a renewed focus on self-reliance in innovation, industry, and advanced technology. They are preparing for a more turbulent global economy by pumping money into local firms and reducing dependence on foreign suppliers.

China has also figured out that instead of manufacturing the entire product, they have focused on making parts that go into products thus making them an integral part of global supply chains. Dinny McMahon, head of markets research at Trivium China, a research and consulting firm said: “Xi Jinping has been talking about this since at least 2019—strengthening global supply chains.” Now, he said, “almost any manufactured good you buy, no matter where it comes from, has some exposure to Chinese supply chains.”

It is believed that China pledged to “significantly” boost the share of consumption in its economy over the next five years while keeping tech and manufacturing as the top priorities. However, this has always been a serious problem.

China’s household consumption is less than 40% of its GDP. Europe and the rest of the world are in the mid 50% range while the U.S. is almost 68%. China has talked about increasing its domestic consumption for decades. The main issue in China is still the housing bust. People that own real estate can’t sell at market prices because the government won’t allow the prices to fall to what the market is. That bubble would create a banking crisis and severely damage the economy. Instead, owners remain fearful and focus on saving rather than spending. In addition, producer and consumer prices have been very low for a long time, which reduces consumption. Manufacturing fell slightly in October in both the official and the S&P Global indices. They are both near 50.

China has an aging population and a low growth rate. The social security network is minimal and another reason they save. Is it any wonder that they cannot grow their domestic consumption?

METALS

Aluminum sets new record high

The spot price for aluminum was up $.23 for the month to an astounding $2.194 on October 31st. This is the highest price in the history of aluminum. Most of the price hike has been driven by Midwest Premium that has gone from $.76 to over $.88 at the end of October.

The Premium spike was caused by Trump raising Section 232 tariff to 50% at the end of June on aluminum and steel imports. This has enabled the few U.S. aluminum producers to begin very nominal new production.

All the downstream consumers of aluminum, auto, cans, aero, extruders, and HVAC to name a few, have seen their aluminum prices skyrocket. On January 2nd, the price of aluminum was $1.38. It climbed to over $1.60 in late March with the anticipation of tariffs. Now with the 50% Section 232, it has gone up to $2.20.

Jorge Vazquez, CEO of Harbor Aluminum, is well respected as an aluminum forecaster. He has done excellent work forecasting aluminum pricing. Since June of this year, when LME was $2470 and the Midwest Premium was near $.60, he has been bullish on LME. He forecasted LME to be $3000 at the end of the year and the Midwest Premium to be $.90. LME has now broken $2900, and the Premium did hit $.90. His new LME forecast for 2026 is $4000.

Before you place your bets, Goldman Sachs is calling for prices to be around $2400 next year. It takes bulls, bears, and being able to pull rabbits out of a hat to forecast anything. The other rule to remember is that 90% of people that trade commodities lose.

Prime aluminum scrap prices rose modestly as consumers have seen a torrent of scrap being attracted from all over the world with the spike in U.S. pricing. Secondary aluminum prices were steady. Copper rose modestly, while stainless steel and the steel mills remained the same.

CLOSING

As we approach Thanksgiving, I would like to share how grateful I am to my readers and the positive feedback we receive. Writing Market Insights gives me the opportunity to continue to research, collect, analyze and learn. My education continues. Thank you so much.

Be well, be safe and take the time to express your love and appreciation to others.

“As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.” - John F. Kennedy