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China curbs export of metals

China announced this week that they would restrict gallium and germanium exports. Both metals are crucial inputs into semiconductors and electric vehicles. China currently produces the majority of the supply of the metals. This was no doubt timed around a visit from US Secretary of Treasury Janet Yellen.

• The changing relationship between the Eastern and Western worlds is likely to define the coming decade
• Our relationship with China is as strained as it’s ever been; however, as we have written in the past, we cannot simply sever completely
• Too many of the inputs we need for the modern economy come from China
• This news was likely a message to the Western world to remind us of that fact

Conflicting jobs data seesaws rates

This week we received conflicting jobs data, causing volatility in the bond market. On Thursday, ADP employment showed 497,000 jobs created, far exceeding expectations of 220,000. On the news, the 2-year treasury yield rose above 5% for the first time in 16 years. Yields on the long end of the curve (10 yr and 30 yr) rose as well. Stocks fell on the news as the market interpreted the news to mean higher rates for longer. The following day, we received the Non-Farm Payrolls, which missed expectations for the first time in over a year, coming in at 209,000. The 2-year traded back below 5% on the news, and stocks rebounded early in the trading day. Notably, the long end of the curve rose higher, with the 10-year and 30-year trading close to this year’s highs.

• The job market is in focus, given how strong it has remained despite one of the most aggressive interest rate hiking cycles in history
• Until recently, the market has been expecting interest rate cuts as soon as the end of this year
• Given the strength of job market, the market has now moved out expectations for cuts into late 2024
• Its not clear yet if valuations in the stock market have fully adjusted for a “higher-for-longer” scenario

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New chatter about Ukrainian nuclear plant

This week there was chatter that Russians were preparing to blow up the Zhaporizhzhaya nuclear power plant, located in a Russian-controlled part of Ukraine. Ukrainian President Zelensky said that Russian troops have placed what appear to be explosive devices on top of several of the plant towers. The power plant is the largest nuclear plant in Europe and has been largely shut down since Russians occupied it during the early days of the war.

• Given the reactors have been shut down (last one on June 8th), the impact may not be as bad as Chernobyl
• However, given very little safety maintenance since the Russians took control, there is still significant risk in case of an explosion
• An act like this could be viewed as an escalation of aggression by NATO or even by Russia’s ally China, which has warned about the use of nuclear weapons as a redline
• In our view, the geopolitical risks associated with an escalation in the war are not currently priced into markets

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