2024 commodity boom and fiscal consolidation

Happy Sunday or Monday, depending on where you are!

Despite Easter celebrations among many of our European and US readers this week and overall subdued market activities, commodity prices remain a focal point, benefiting some traders while imposing additional costs on consumers and producers. Additionally, the fiscal consolidation efforts in several geopolitically significant nations this week deserve separate coverage from us.

In this publication:

• Argentina’s Milei wields his chainsaw to fire 70,000 people

• Zambia Restructures $3.5 Billion of Debt!

• GS foresees 15% return for commodities with cocoa market going nuts

• UN Security Council's failed Gaza cease-fire attempt spikes oil prices

• Consensus on ECB rate cuts

Let’s dissect

Markets Snapshot

Bond Markets

• US: During Jerome Powell's highly anticipated FOMC press conference last week, a significant highlight emerged: for the first time in this economic upswing, he hinted that increase in unemployment could still lead to interest rate cuts. The Fed's projections anticipate a slight rise in unemployment to 4% by the end of 2024 from 3.9% in February. The willingness to adjust policy in response to labor market changes underscores the Fed's cautious approach to navigating inflation and economic stability.

  Fed Governor Lisa Cook stressed the importance of exercising caution in determining when to decrease interest rates, while Atlanta Fed President Raphael Bostic revised his projections to anticipate a single quarter-point rate cut, a shift from his earlier prediction of two cuts. US 10-year Treasury yields remained elevated at 4.20%-4.25% as traders analyzed economic indicators and comments from Fed officials.

• EU: ECB board member Piero Cipollone hinted at the possibility of ‘swiftly’ lowering interest rates, even as workers receive substantial wage increases to offset two years of high inflation. As inflation subsides, the ECB is reaching a point where monetary policies could be eased. While there's consensus on starting rate cuts by June's meeting, the pace of reducing borrowing costs remains a topic of debate due to lingering inflation uncertainties.

Commodity Markets

• Goldman Sachs projects a 15% return on commodities this year, driven by lower borrowing costs stimulating industrial and consumer demand, increased manufacturing, and ongoing geopolitical tensions.

• Oil: The first quarter saw modest gains in commodities, with crude oil strengthening, supported by signals of lower interest rates and China's commitment to support its economic recovery. While market sentiment hasn't reached the early 2023 optimism of crude reaching USD 100 per barrel, firms such as Morgan Stanley and Trafigura Group anticipate further price increases. Brent crude futures have risen by approximately 11% this year, regularly exceeding USD 85 per barrel. This upward trend may present challenges for central banks and consumers alike, impacting anti-inflation efforts.

  Brent crude closed at $86.97 per barrel just before the Easter break, spurred by failed UN Security Council attempts to broker a Gaza ceasefire during Ramadan, which intensified Middle East tensions.

• Gas: Demand for Russian gas in Uzbekistan is on the rise, according to Kazakhstan's energy minister. It aligns with initial projections, following a contract between Russian Gazprom and Kazakhstan's QazaqGaz signed in June 2023 for the transit of Russian natural gas through Kazakhstan to Uzbekistan. Russian gas supplies to Uzbekistan through Kazakhstan are expected to increase nearly fourfold by 2026, reaching 11 billion cubic meters per year.

• Cocoa: Cocoa prices hit $10,000 per metric ton this week, just in time for Easter chocolates. Ghana and Ivory Coast, the world's top cocoa producers, accounting for over 60 percent of global supply collectively, are both experiencing disastrous harvests this season. Anticipated cocoa bean shortages, essential for chocolate production, have driven New York cocoa futures to more than double in value this year. As a result, US Easter chocolate prices have surged by over 10% compared to last year, according to data from research firm NielsenIQ.

Global Finance

Zambia Strikes Debt Deal with Bondholders

• Zambia announced on Monday that it had reached an agreement with a consortium of private creditors to restructure $3.5 billion of its international bonds. Following the announcement, Zambia's 2027 Eurobond saw its price rise to its highest level since May 2022.

• The restructuring agreement involves exchanging Zambia's three current instruments for two amortizing bonds. One of these bonds would offer increased repayments if the country's economic prospects and ability to manage its debt burden improve. In total, bondholders would be waiving approximately $840 million of their claims, implying a haircut of 21.6% of the total nominal face value of the bonds.

• After reaching agreements with official creditors last year and private creditors a few days ago, the only deal outstanding is with commercial lenders. This includes Jiangxi Bank Co. and Industrial and Commercial Bank of China Ltd. , which are owed hundreds of millions of dollars by Zambia.

• This success also highlights progress under the Group of 20's Common Framework, aimed at assisting poor countries with debt overhaul, despite criticism for lengthy processes. It also marks the first of its kind under the Common Framework, with Chinese state-owned creditors agreeing to a restructuring similar to that of dollar bonds. Typically, bondholders prefer early repayment and accept haircuts, whereas Chinese lenders often extend loan maturities at lower rates, aiming for full principal repayment.

Our thoughts

• Zambia's agreement with private creditors is a major advancement in its prolonged debt restructuring process. We expect the deal to also facilitate negotiations with Chinese state-owned creditors, as the successful restructuring of $3.5 billion of its international bonds demonstrated the prerequisites for dealing with various types of lenders.

Argentina Pushes to Cut 70,000 Officials

• Argentine President Javier Milei is spearheading a significant reduction in public sector employment, with plans to lay off 70,000 government workers as part of a broader effort to slash state expenditures. In addition to these cuts, Milei has declared a halt on public works, decreased provincial funding, and cancellation of numerous social welfare programs.

• Milei’s administration aims to attain fiscal equilibrium, while also asserting that the peso's current value aligns with the central bank’s strategies. The IMF has already praised Argentina's progress with its stabilization plan despite anticipating a challenging path ahead that demands rigorous and adaptable policy enforcement to maintain fiscal consolidation.

• During his speech on Tuesday, Milei also vowed to double down on Argentine economic reform post-2025 elections, with over 3,000 reforms in the works. Previously, Argentina’s Senate rejected Milei’s sweeping emergency decree aimed at deregulating the economy, which sought to modify or eliminate over 300 regulations affecting various sectors including the housing rental market, food retailers, air travel, and land ownership.

Our thoughts

• Despite 70,000 employees comprising a small fraction of Argentina’s 3.5 million public sector workforce, the proposed job cuts are poised to face opposition from the country’s influential labor unions, potentially putting President Milei's high approval ratings at risk.

• The legislative challenge poses a threat to Milei's ambitious economic deregulation plan, especially amidst a recession and skyrocketing inflation rates. Ultimately, implementation of reforms hinge on his ability to swiftly reduce inflation, currently at an annual rate of 276 percent. We have already covered in detail Milei’s economic shock therapy and push for bold yet critically important reforms, which you can read about it here.

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