Rail Strike Likely Averted, Hurdles Remain
RedStone Resource
December 2, 2022
Inside This Edition
China Easing Zero Covid Restrictions – Mixed News for the Global Supply Chain
The Chinese government has said that it will begin to ease restrictions in its zero-Covid policy. Protests across the country likely weighed heavily on the decision to publicly start rolling back some controls on Covid, but the impact could be interesting, nonetheless.
Rail Strike Likely Averted, Hurdles Remain
The rail labor contract negotiations have come down to the wire with the House of Representatives passing a bill that imposes a labor agreement that was hammered out by negotiators. That contract was ratified by 9 of the unions in the negotiations, but four rejected it.
Where do Oil Prices Go from Here?
The EU is quickly approaching a December 5th deadline to stop purchasing Russian oil amid a loosely aligned strategy to reduce the amount of money fueling Russia’s conflict with Ukraine. Since oil is facing tight supplies and Europe is reeling under a shortage of energy, ministers from major G7 nations have proposed to introduce a price cap limiting the price per barrel that buyers are willing to pay for Russian oil.
ECONOMIC BRIEFING
Federal Reserve Hints at Easing Rate Hikes
The Federal Reserve is getting mixed signals on the economy. Consumer spending remains robust, and the jobs market is largely still adding jobs and compensation is still rising at a fast pace. But manufacturing is slowing, corporate investment is beginning to soften, and many other metrics of broader macroeconomic activity are also showing signs of easing. The challenge for the Fed is that interest rate hikes typically require 3-6 months to begin having a slowing effect on the economy. The chances of an “overreach” are higher when rates are climbing quickly.
In his latest speech, Fed Chairman Jerome Powell said that the full effects of current rate hikes have not yet been felt across the economy and was not yet showing up in the data. Interest rate hikes are critical in forecasting whether the US has a recession or not. Without interest rate hikes, the economy would continue to grow at a rapid pace – but also at a far higher cost. Because of inflationary pressure, more than 61% of US households are living check-to-check and go underwater with each unexpected monthly cost (replacing tires on a vehicle, an unexpected home repair, medical expense, etc.). Having a deeper financial crisis at the hands of hotter inflation is a far greater risk than a recession caused by rate hikes, which is why the Federal Reserve continues to push toward a higher rate environment for now.
China Easing Zero Covid Restrictions – Mixed News for the Global Supply Chain
In what has become a “fits and starts” scenario in China, the government has said that it will begin to ease restrictions in its zero-Covid policy. Protests across the country likely weighed heavily on the decision to publicly start rolling back some controls on Covid, but the impact could be interesting, nonetheless.
China’s manufacturing sector remained in contraction for the fourth month in a row. But this slowing of manufacturing in the country has helped commodity prices ease in many parts of the world. Prices for raw materials have fallen off their peaks, despite falling inventory levels for many key materials such as aluminum, nickel, zinc, copper, and lead. Petroleum prices also eased initially on the news that China was facing tougher lockdowns and protests were erupting. Now that there seems to be an easing of policy, petroleum prices have risen nearly $6 a barrel on the news with West Texas Intermediate moving above $81 a barrel at the time of writing. With commodity inventories tight, a resumption of price inflation could resume as China reopens.
TRANSPORTATION BRIEFING
Rail Strike Likely Averted, Hurdles Remain
The rail labor contract negotiations have come down to the wire with the House of Representatives passing a bill that imposes a labor agreement that was hammered out by negotiators. That contract was ratified by 9 of the unions in the negotiations, but four rejected it. The sticking point continues to be issues of time off, scheduling, and crew sizes. Most of the provisions for pay increases were agreed to by all parties.
Even if the Senate passes the bill including a supplement that would increase sick leave for workers (thereby closing the disagreement gap between parties), it still is not a deal that everyone will gladly accept. To suggest that everyone will continue working in harmony and that there won’t be sick-outs or other means of delaying work is a difficult task.
Rail firms would have to stop accepting certain types of hazardous cargo by December 2nd if there is no resolution to avoid a strike (currently set to potentially start on December 9th).
Where do Oil Prices Go from Here?
The EU is quickly approaching a December 5th deadline to stop purchasing Russian oil amid a loosely aligned strategy to reduce the amount of money fueling Russia’s conflict with Ukraine. Since oil is facing tight supplies and Europe is reeling under a shortage of energy, ministers from major G7 nations have proposed to introduce a price cap limiting the price per barrel that buyers are willing to pay for Russian oil (theoretically reducing Russian profits). A new cap has been proposed at $62 a barrel. Russian oil has recently traded at $66 a barrel, this would do little to trim Russian profits and countries like Poland, Estonia, and Lithuania have pushed back saying that it isn’t aggressive enough.
If the Russian oil embargo in Europe were to hold, countries like the US would be asked to help fill those gaps in supply, spare capacity that the US really doesn’t have. Prices for oil will remain volatile in the coming months. As Europe approaches spring and warmer weather, petroleum inventories are likely to recover. In the meantime, inventories remain tight, and prices remain firm.
