Evening Report | December 29, 2022

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U.S. dollar flexed its muscle in 2022... Despite a recent downturn, the U.S. dollar index enjoyed one of its strongest years ever, up almost 9% year-to-date, as the Federal Reserve focused on stubbornly high inflation by aggressively raising interest rates. The U.S. central bank hiked its federal-funds rate by a cumulative 4.25% this year, the most since 1980, bringing borrowing costs to the highest level in 15 years while pledging that rates would need to go even higher in 2023. This dollar’s strength was seen across the board, with some of the most pronounced buying activity against the yen, given the widened gap in interest rates.

China has increased trade with the rest of Asia as the U.S. pushes for decoupling... China’s total trade — exports plus imports — with 10 of its neighbors in Southeast Asia has grown 71% since July 2018, when the U.S. first placed tariffs on a range of Chinese goods, according to a Wall Street Journal analysis/ Behind the trend, economists say, are powerful economic forces that tend to bind smaller economies to bigger ones as well as China’s dominant role as a supplier of the kind of affordable goods that fast-growing countries need, such as cars and machinery. The upshot is the U.S. will find it hard to nudge Asia away from China without more concrete steps to boost trade with its own huge domestic market.

Consumers changing their food-delivery habits... Consumers continue to spend more on the biggest food-delivery apps DoorDash and Uber Eats, but growth is slowing and people are spending more cautiously, analysts and industry executives said, the Wall Street Journal reports. DoorDash’s CEO said some consumers are moving from expensive restaurants to fast food, while others are cutting back on the number of items in a restaurant order. Restaurant executives say some customers are picking up more of their food to avoid delivery fees.

Gold Outlook 2023: Global economy at a crossroads... The World Gold Council says: “The global economy is at an inflection point after being hit by various shocks over the past year. The biggest was induced by central banks as they stepped up their aggressive fight against inflation. Going forward, this interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold’s performance.

“Economic consensus calls for weaker global growth akin to a short, possibly localized recession; falling – yet elevated – inflation; and the end of rate hikes in most developed markets. In this environment, which carries both headwinds and tailwinds for gold, our key take-aways are:

• A mild recession and weaker earnings have historically been gold-positive.
• Further weakening of the dollar as inflation recedes could provide support for gold.
• Geopolitical flare-ups should continue to make gold a valuable tail risk hedge.
• Chinese economic growth should improve next year, boosting consumer gold demand.
• Long-term bond yields are likely to remain high but a levels that have not hampered gold historically.
• Pressure on commodities due to a slowing economy is likely to provide headwinds to gold in H1.
• On balance, this mixed set of influences implies a stable but positive performance for gold.

“That said, there is an unusually high level of uncertainty surrounding consensus expectations for 2023. For example, central banks tightening more than is necessary could result in a more severe and widespread downturn. Equally, central banks abruptly reversing course – halting or reversing hikes before inflation is controlled –could leave the global economy teetering close to stagflation. Gold has historically responded positively to these environments.

“On the flipside, a less likely ‘soft landing’ that avoids recession could be detrimental to gold and benefit risk assets.”

Cattle futures ending 2022 near eight-year highs… Live cattle futures extended the past week’s rally amid expectations tight supplies of market-ready animals will support the cash market well into 2023. December live cattle settled today at $158.50, the highest close for a nearby contract since April 2015, based on the continuation chart. Futures portend even pricier cattle in 2023, with the April contract settling at $162.45.

Fuel tax set to rise in three Midwestern states. On Jan. 1, 2023, fuel tax increases will take effect in Illinois, Michigan, and Nebraska. Originally set for July 1, a fuel tax increase in Illinois (link) was postponed for 6 months to help offset rising inflation and high fuel prices nationwide. With the rate increase in place, Illinois’ excise taxes on gasoline and diesel will rise 3.1 cents to 42.3 cents and 49.8 cents, respectively. Likewise, on Jan. 1, the Michigan diesel tax rate (link) will rise 1.4 cents to 28.6 cents. Also, on Jan. 1, the Nebraska diesel tax rate (link) will rise 4.2 cents to 29 cents, and that rate will remain in effect until June 30, 2023.

Diesel price drops for seventh consecutive week... For the week ending Dec. 26, the U.S. average diesel fuel price fell 5.9 cents from the previous week to $4.537 per gallon, 92.2 cents above the same week last year. Since Nov. 7, the diesel price has declined 79.6 cents per gallon. Lower diesel prices reflect increased refinery output, as well as the combined decreases in crude oil prices and wholesale and retail margins. In the Midwest, the diesel price dropped 7.5 cents per gallon to $4.402, 92.3 cents above the same week last year.