The Precious Metals Week in Review – July 14th, 2023

1. Major banks are facing one of the biggest regulatory overhauls since the financial crisis, setting up a clash over the amount of capital that they must set aside to weather the tumult. The Federal Reserve’s top banking regulator, Michael Barr, said he wants Wall Street banks to start using a standardized approach for estimating credit, operational, and trading risks, rather than relying on their own estimates. He added that the Fed’s annual stress tests should be redesigned to better capture the dangers that firms can face. The changes stem from a months-long review to align U.S. rules with a set of international standards known as Basel III. Industry titans have long fought against higher capital requirements, and the issue became a political lightning rod after several lenders including Silicon Valley Bank collapsed this year. The announcement arrived just days before the largest banks began posting their second-quarter results, starting on Friday with JPMorgan Chase, Citigroup, and Wells Fargo. “These changes would increase capital requirements overall, but I want to emphasize that they would principally raise capital requirements for the largest, most complex banks,” he said in a speech at the Bipartisan Policy Center in Washington. “We intend to consider comments carefully and any changes would be implemented with an appropriate phase-in,” he said, adding that most banks already have enough capital to meet the new requirements. Barr said the changes will only take effect if they’re proposed and approved by the Fed, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency. An initial plan could be released as soon as this month, but actual changes would not likely take effect for months or years. The industry will also have a chance to weigh in.

2. Tucked away in hours of congressional testimony by Federal Reserve Chair Jerome Powell last month was an admission that the central bank was blindsided by the impact of shrinking its balance sheet four years ago. While Powell assured lawmakers the Fed is committed to avoiding a repeat of 2019, when the repo market, a key part of U.S. financial plumbing, seized up. Wall Street economists and strategists caution that quantitative tightening remains complex and hard to predict. Known as QT, it involves letting Fed bond holdings mature without replacement, draining cash from the financial system. In the coming months, the full brunt of the Fed’s current QT program is set to be felt. How it proceeds, and how the Fed handles the process, could shape its political latitude to keep using its balance sheet as a key tool in the future. “We didn’t see it coming,” Powell acknowledged at the House Financial Services Committee on June 21 when referencing the sudden problems that emerged in 2019 and forced the central bank into steps it didn’t want. The advantage now is “we have experience,” he said. With the Treasury in the middle of ramping up its own cash reserve by as much as $1 trillion, market participants will be closely monitoring what gets drained as that goes ahead. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities said it’s unclear how the Treasury’s bill sales will be funded. And that in turn leaves the impact of the Fed’s QT a question mark. “Saying everything is OK is like calling the game after the first quarter,” he said. “Last time the Fed hit the wall at 60 miles an hour as they weren’t expecting reserve scarcity to be there, and the risk now again bears watching.”

3. A federal judge in Louisiana denied a request by the U.S. government to delay an order he imposed last week banning federal agencies and officials from communicating with social media companies. The Justice Department is expected to ask the 5th U.S. Circuit Court of Appeals to intervene after U.S. District Court Judge Terry Doughty on Monday refused to pause his July 4 nationwide injunction. He also denied the government’s alternative request for a seven-day pause while it petitions the appeals court to step in. Doughty defended his order against the Justice Department’s argument that it is overly broad and unclear in defining what kind of communication with tech companies is no longer allowed. He wrote that the government isn’t entitled to a delay in enforcing his order since they were likely to lose on the merits of the case and that the Justice Department failed to identify specific examples of government activity that would be hurt in the meantime. Although the ruling involves numerous agencies, “it is not as broad as it appears,” the judge wrote in the order. “It only prohibits something the Defendants have no legal right to do — contacting social media companies for the purpose of urging, encouraging, pressuring, or inducing in any manner, the removal, deletion, suppression, or reduction of content containing protected free speech posted on social media platforms.”

4. Three Federal Reserve officials on Monday said policymakers will need to raise interest rates further this year to bring inflation back to the central bank’s goal. “We’ve made a lot of progress in monetary policy, the work that we need to do, over the last year,” Federal Reserve Vice Chair for Supervision Michael Barr told the media on Monday. “I would say we’re close, but we still have a bit of work to do.” The Fed held interest rates steady in June after raising them for 10 straight meetings to a range of 5% to 5.25%. Most policymakers expect to increase rates by a further half percentage point by the end of the year, according to projections released after their June gathering. “We’re likely to need a couple more rate hikes over the course of this year to really bring inflation back into a path that’s along a sustainable 2% path.” The FOMC next meets July 25-26 and is widely expected to resume rate increases at that meeting. San Francisco Fed President Mary Daly said the risks of doing too little to curb inflation still outweigh the risks of doing too much, though the gap between those two is narrowing. The San Francisco Fed chief said she is starting to see signs of the economy slowing and added that supply and demand are coming into better balance. Cleveland Fed chief Loretta Mester, speaking at an event hosted by the University of California, San Diego, said her own view also “accords with” Fed officials’ median forecast for two more rate increases.

5. Bank of America has been ordered to pay $250 million for illegally charging junk fees, withholding credit card rewards, and opening fake accounts. The Consumer Financial Protection Bureau (CFPB) accused the bank of harming hundreds of thousands of customers by systematically double-dipping on fees for account holders with insufficient funds. Customers are in line for a $100 million refund – while the bank will be forced to pay $150 million in penalties to the CFPB and the Office of the Comptroller of the Currency (OCC). Some of the allegations are reminiscent of the Wells Fargo scandal last decade when the bank was ordered to pay $ 190 million after staff were found to be signing customers up to additional bank accounts and credit cards without their knowledge. Earlier this year, the government pledged to crack down on sneaky junk fees, which inflate prices and make it difficult for consumers to know exactly how much they will end up paying for a service. The White House estimates these add-ons cost Americans around $65 billion every year. “Bank of America wrongfully withheld credit card rewards, double-dipped on fees, and opened accounts without consent,” said CFPB Director Rohit Chopra. “These practices are illegal and undermine customer trust. The CFPB will be putting an end to these practices across the banking system.”

6. Stellantis NV and Toyota Motor Corp. blasted a Biden administration plan to squelch auto pollution, saying it would compel aggressive and unrealistic sales of electric vehicles that strain critical mineral supplies. In comments filed with the federal government, the automakers warned that proposed emission curbs for cars and light trucks are overly optimistic and discriminate against plug-in hybrid vehicles. The administration’s proposal “underestimates key challenges, including the scarcity of minerals to make batteries, the fact that these minerals are not mined or refined in the U.S., the inadequate infrastructure and the high cost of battery-electric vehicles,” Toyota said. The comments come as automakers grapple with what would be the most ambitious U.S. tailpipe emission limits ever, applying in model years 2027 and beyond. To meet the limits the Environmental Protection Agency envisions automakers will have to massively boost electric vehicle penetration so that EVs account for 67% of new light-duty vehicle sales and 46% of new medium-duty vehicle sales in model year 2032. By contrast, battery electric vehicles and plug-in hybrids are less than 10% of the market today. Though companies could comply using other technology, the proposed standards are based on as much as 70% of fleets being emission-free, and critics have dubbed the proposal a de facto EV mandate that stifles consumer choice. Stellantis, formed from the merger of Fiat Chrysler and France’s PSA Group said the EPA had an “overly optimistic expectation for EV market growth” and was “assuming a ‘perfect’ transition,” while underestimating challenges such as lagging manufacturing capacity and consumer support. Toyota faulted the EPA for relying on a “cursory assessment” about the supply of critical battery minerals, including from U.S. deposits. Gasoline and ethanol producers said the government was discounting the potential of low-carbon fuels to reduce emissions. By focusing only on tailpipe pollution, the EPA “paints a distorted picture and perpetuates the false notion that electric vehicles are ‘zero emitters,” the American Fuel and Petrochemical Manufacturers said. The approach ignores pollution associated with manufacturing and powering electric cars, and “heavily puts the thumb on the scale in favor of EVs,” said the pro-ethanol group Growth Energy.

7. In the week ending July 8, the advance figure for seasonally adjusted initial claims was 237,000, a decrease of 12,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 248,000 to 249,000. The 4-week moving average was 246,750, a decrease of 6,750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 253,250 to 253,500.

8. Oil prices headed lower on Friday but looked to post their longest consecutive streak of weekly gains since April as production cuts and a weaker U.S. dollar have pushed prices higher. West Texas Intermediate crude for August delivery fell by $1.31, or 1.7%, to $75.58 a barrel on the New York Mercantile Exchange, paring its weekly rise to around 2.3%. September Brent crude fell by 96 cents, or 1.2%, to $80.40 a barrel on ICE Futures Europe, poised for a weekly rise of 2.5%. Brent and WTI prices based on the front-month contracts were up a third straight week, set to mark the longest consecutive weekly gains since the week ended April 14.

9. The EUR/USD continues to fluctuate in its daily range above 1.1200 as the US Dollar clings to modest recovery gains after better-than-expected confidence data. The pair is up more than 200 pips a week and stays on track to post its highest weekly close since February 2022. Signs of disinflation in the US and an elevated level of skepticism about the ability of the Fed to hike rates beyond the July meeting suggest that a soft USD is likely to prevail in the near term. That said, signs that the ECB’s rate hike cycle is moving towards its peak suggest that EUR/USD could struggle to make further gains beyond the summer season.

10. USD/JPY recovers some ground but is still at risk of erasing most of its earlier gains after data from the United States continued to show inflation is decelerating. At the same time, an improvement in U.S. consumer sentiment lifted the pair towards its daily high of 139.15 before reversing its curse. The USD/JPY is trading at 138.47 after hitting a daily low of 137.21, up 0.31%.

The resilient American shopper is showing more signs of weakness. Over the past year, many U.S. consumers responded to surging inflation by trading down to cheaper options. But now they’re just going without, said Sean Connolly, chief executive officer of Conagra Brands. The behavioral shift began shortly after the Easter holiday in early April, he said. “Importantly, where we see it, it is usually not a trade down to lower-priced alternatives within the category; rather, it’s an overall category slowdown.” Connolly added that he expects the behavior to be short-term and that “people aren’t eating less.” Certain grocery categories are feeling the pullback more than others, according to data from researcher NIQ. In food, overall units sold are down 2% this year, with some of the biggest declines coming in frozen meals, fruit juice, and soup. People are likely “burning through inventory in their homes,” said NIQ’s Carman Allison. “We’re spending more, but we’re buying less.” Conagra’s results point to the dilemma facing consumer-focused companies that have relied on price increases to make up for softness in the number of items they’ve been selling. In the quarter ended May 28, the owner of the Slim Jim brand reported a 7.7% drop in volume, but revenue rose 2.2% thanks largely to higher prices. “The consumer is very creative and very crafty in terms of finding ways to stretch their budget,” he said. “One of the ways they make that happen is they just cut back temporarily on the stuff that they buy in order to be able to fund other expenses. That’s what we believe.”

The Bank of Canada is likely to increase interest rates for a second consecutive meeting, bringing borrowing costs to a level not seen in 22 years. Economists and markets expect Governor Tiff Macklem and his officials to raise the benchmark overnight rate to 5% on Wednesday at 10 a.m. in Ottawa. Most major commercial lenders in Canada predict the hike will be the last in this cycle. Policymakers aren’t likely to explicitly signal that they’re finished. Instead, they may be inclined to leave the threat of more hikes on the table as they assess how the economy is absorbing higher interest payments. That would also avoid a replay to January when they paused and triggered a wave of market speculation about rate cuts. “They have to sound credibly hawkish,” Benjamin Reitzes, a rates and macro strategist at the Bank of Montreal, said. “The door has to stay open for more — they can’t risk a repeat of the post-January move in markets and housing.” Most economists assumed Canada’s highly indebted households had been pinched enough to slow their spending, cooling the economy and inflation pressures. Officials at the Federal Reserve are saying U.S. rates will need to go higher. The European Central Bank isn’t done hiking yet, and Bank of England policy is becoming a national obsession in the UK.

The U.S. Federal Trade Commission has opened an investigation into OpenAI, questioning whether its popular ChatGPT conversational AI bot puts consumers’ reputations and data at risk. The probe into the Microsoft-backed startup marks the first official inquiry into a technology that has the potential to change almost every aspect of people’s lives and has become equally as fascinating for its potential to run awry. The rapid rise of technology in the past eight months since ChatGPT became widely available has prompted calls for regulation and a pause in the training of advanced AI systems. This, is even among the heads of some of the leading companies in the field. OpenAI Chief Executive Officer Sam Altman has been an outspoken proponent of regulation. In a May hearing, Altman said Congress should create robust safety standards for advanced AI systems. “If this technology goes wrong, it can go quite wrong,” Altman said. Twitter owner Elon Musk has also been one of the loudest voices in warnings about the potential consequences of mainstreaming AI. A prominent tech ethics group filed a complaint in March urging the FTC to halt further commercial deployment of the technology that powers ChatGPT. The complaint from the Center for Artificial Intelligence and Digital Policy, which is led by longtime privacy advocate Marc Rotenberg, called on the FTC to open the investigation and “ensure the establishment of necessary guardrails to protect consumers, businesses, and the commercial marketplace.” The FTC also asked the company to supply records related to a security incident that the company disclosed in March when a bug in its systems allowed some users to see payment-related information, as well as some data from other users’ chat history.

Geopolitical, economic, and environmental uncertainty can be expected to continue in the near term. Astute investors continue to seek out alternative investments for their portfolios to aid in diversifying them away from overexposure to any single asset class. Some are seeking out buying opportunities from temporary price dips to add more physical precious metals into their portfolios. Remember that one of the keys to profitability through the ownership of physical precious metals is to acquire the physical product and hold on to it for the long term without overextending your ability to maintain its ownership.

Trading Department – Precious Metals International Ltd.

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