There is no tariff inflation yet

good morning. Yesterday, the US and China announced they had agreed to a framework to restore a trade war ceasefire. Although the details are sparse, there appears to be concessions from China on rare earths and magnets, and the US will ease some technology export controls and visa restrictions. The market was not excited. The S&P 500 cut the day by 0.3%, and the Chinese market rose slightly. Email: Unedged@ft.com.

inflation

It makes sense that April’s CPI report had no significant impact on prices from customs duties. It was early in Donald Trump’s tariff war, and it takes time for producers and retailers to make pricing decisions. A cooler report than expected in May requires a bit more explanation.

Core inflation, which excludes energy and food, was the same as in April, up 2.8% from the previous year. However, after picking up in April, Core CPI’s annual monthly change has dropped uncontrolled measurements.

There were some indications that tariffs were pushing prices up, but major appliances jumped over 4% since April, and toy prices rose 1.3%, but the real surprise is that prices didn’t rise. Apparel fell by 0.4% that month. Even if carmakers say they need to raise prices, prices for new and used cars have fallen. Smartphone prices have also fallen.

But, alas, it’s too early to say that the good news continues. Given the wild contradictions in the administration’s tariff policy, importers, wholesalers and retailers could still work through pre-tax inventory or have held market share while waiting, sacrificing some margin to see where the tariffs actually go. However, we believe that future price pressures could be put in place as tariffs continue and stocks continue to decline.

There are also some reports. This suggests that some of the disadvantaged inflation still remains, setting the situation for stickiness in the Federal Reserve. Services (excluding energy services) were moderate, but were staying stubbornly high at 3.6% year-on-year, mainly due to rising rents. The Trump administration’s immigration policy could play a role. According to the Bureau of Labor Statistics, the industry that relies on at home and elderly care – particularly on migrant labor, saw an increase of 7.1% per year.

Every month when imported products don’t rise immediately is a good month. The economy is flexible enough, the corporate margins are thick enough, Trump and his team may be ti-sick enough, and tariffs will ultimately have a mild effect on prices. But it certainly takes a few more months and the market seems to agree. Fed-Policy-sensitive two-year financial yields fell by 7 basis points in the CPI report, but stocks remained under control.

The rate reduction case is in shape, but we all need to hold our breath a little more.

(Kim)

Distorted copper market

The Trump administration has yet to announce copper tariffs, but there is widespread speculation it plans to do. The reason is simple. China extracted copper from copper smelting or copper concentrates. And the administration appears to want to mine and smelt copper in the United States, which considers this a national security issue. China’s overcapacity actually causes market distortions, but the tariff threat only exacerbated the problem.

Copper and other tariff outlooks have led to a rise in copper prices, which are well above London prices.

Divergence led to a massive flow of copper into the United States. US manufacturers are buying to go ahead of any possible tariffs, and traders are using price arbitrages to scramble to cover their positions in the physical settlements of metals. US copper inventory reached a five-year high:

The arbitrage affects prices around the world. Prices in London are rising to keep up. Also, copper buyers in Europe, Africa and Asia are facing shortages and paying premiums in addition to London fees.

This is in addition to the Chinese issue. The Chinese government has been pushing to support the metals industry in recent years, resulting in a massive increase in smelting capacity. This has created an imbalance in supply and demand in the market for copper concentrates that has not particularly merit, said Andrew Cole, a leading analyst for First Market Basic Metals.

That existing supply imbalance and extra demand from the US have at least transformed the economics of China’s smelting industry into its head. Usually, smelters charge a fee to convert copper concentrates into refined copper. That fee is now negative. In other words, smelters pay miners and metals companies to gain concentration to keep their businesses running.

So far, China’s smelter production has not decreased accordingly. As Fastmarkets’ Cole pointed out HOSDED, “The smelter was very resilient. And there was little reduction for us.” In fact, China’s exports of completed copper are generally increasing. And they also have Chinese imports of copper concentrates:

According to Alice Fox, Associate Director of Product Strategy for Macquarie Group, the recent reversal of spot prices has largely reflected the Chinese market, but smelters elsewhere are also feeling a pinch.

Negative prices are spot prices. Instead, many concentrates are sold on an annual basis, but currently has a plus (smelting fee) of $21.50 per tonne. It’s still very low. At that level, the smelter must just be. . . There are concerns about how long the smelters can last at low or negative margins.

For most (smelting) vertically integrated smelters outside China, 90% of the concentrate is under an annual contract with a positive (fees).

Smelters also generate revenue from other metals, such as gold, which is a by-product of copper smelting. It should help them maintain the solvent.

If Trump’s tariffs are in effect and more US smelting capacity is brought online – without a drop in smelting capacity or picking up copper mining elsewhere, the competition between the country and smelting machinery could be more intense and flowing into copper prices. However, there are times when Chinese smelters could cut their production. However, in the short term, many analysts are bullish on copper prices. From Cole in FastMarkets:

Copper has a bullish underlying current due to supply distortions associated with evil function due to the threat of supply destruction caused by extreme imbalances in the copper raw material (concentrate) market.

The strange events at the copper market are just an example of the problems seen elsewhere. China’s overpower, supported by the state, creates distortions. US customs policies – actual or expected – introduce new imbalances.

(writer)

One good read

Nuclear economics.

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