Aurelia Butler

WASHINGTON (Reuters) -The U.S. government will begin defaulting on its payment obligations between early June and early August without an increase in the federal debt limit, the Bipartisan Policy Center said on Tuesday, flagging pressure from a drop in tax revenue.The front end of the centrist think tank’s latest estimate for the so-called “X-date” – when the government runs short of cash to pay its obligations – lines up with that of U.S. Treasury Secretary Janet Yellen, who warned last week that a default could come as early as June 1.The Bipartisan Policy Center (BPC), which closely monitors debt limit disputes in Congress, had estimated in February the X-date could come between summer and early fall, but now sees a default hitting much earlier if Congress fails to raise the $31.4 trillion U.S. borrowing cap. Economists warn a lengthy default could send the U.S. economy into a deep recession with soaring unemployment, while destabilizing the global financial system that is built on U.S. bonds. Already investors are bracing for impact, demanding sharply higher yields on Treasury securities that mature in early June.In its latest analysis, the think tank said weak revenues during the spring tax filing season have been exacerbated by payment delays granted to taxpayers in some severe storm disaster areas, including much of California and certain counties in Georgia and Alabama, until Oct. 16, increasing the odds of a cash shortfall by early June. “The coming weeks are critical for assessing the strength of government cash flows,” Shai Akabas, BPC director of economic policy said in a statement. “If a solution is not reached before June, policymakers may be playing daily Russian Roulette with the full faith and credit of the United States, risking financial disaster for their constituents and the country.”The Treasury reported a Friday cash balance of $206.7 billion and the BPC report said the department had about $115 billion worth of remaining borrowing capacity under $230 billion of extraordinary cash management measures. TAX LIFELINEBut if tax revenues allow Treasury to meet obligations through mid-June, quarterly estimated tax payments due on June 15 can likely float the government through June 30, BPC said in its analysis.On that date, the Treasury would be able to access $143 billion in additional borrowing headroom by suspending reinvestment of maturing investments in the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, among the remaining extraordinary cash management measures that could be activated.”In such a scenario, the additional room created by these measures would support Treasury’s ability to make good on our obligations through at least early July and perhaps several weeks beyond,” BPC said.The think tank’s latest estimate roughly agrees with the Congressional Budget Office’s revised assessment that there is now a “significantly greater risk” of an early June default.Later on Tuesday, President Joe Biden is scheduled to meet with U.S. House of Representatives speaker Kevin McCarthy and other congressional leaders to discuss options to resolve the debt limit standoff between Democrats and Republicans. Biden has so far refused to negotiate on Republicans’ demands for spending cuts in exchange for raising the debt ceiling, but has said he is willing to discuss reducing deficits once the limit has been increased. More

Chinese iron ore prices dropped to their lowest levels in five months, as weak demand adds to evidence that the country’s economic rebound from tough coronavirus lockdowns may be faltering.After strong steel production during the first quarter, the optimism and activity that followed the end of lockdown have waned, leading to a “collapse” in the steel market and raising questions about the durability of the Chinese economic recovery.The price of iron delivered into the northern Chinese port of Qingdao fell to $102.7 last week, down 23 per cent from its recent high in March, recovering slightly to $107.9 at Monday’s close. The benchmark is regarded as a key price-setter for the global market because China is the world’s largest consumer of iron ore, the crucial ingredient for steelmaking. Iron ore is also a major profit driver for western mining companies such as BHP, Rio Tinto and Vale. Normally March and April are peak production months for the Chinese steel market, but this year the country’s mills have cut their output in April as softening demand for steel makes it hard for them to generate profits.During the first quarter, steel production at Chinese mills was 6.1 per cent higher than the same time last year, reaching 262mn tonnes, but customer orders have not kept pace, according to the Chinese Steel Industry Association.“The demand for steel has collapsed since the start of April,” said one Hong Kong-based trader. “The market was expecting a 10 per cent increase in steel demand for infrastructure [this year], but our most optimistic estimate is 2 per cent.”China’s manufacturing activity slowed in April, with the purchasing managers’ index that measures industry activity falling from 51.9 in March to 49.2 in April. A reading below 50 indicates a contraction.In the construction sector, which accounts for about half of Chinese steel demand, growth has been slower than expected. New property starts in March were down 29.1 per cent compared with the same time the previous year.Steel demand from the automotive sector, which accounts for between 10 and 15 per cent of Chinese steel consumption, has also been weak.The slowdown in the manufacturing and construction sectors comes despite China last month reporting annual quarterly GDP growth of 4.5 per cent, well ahead of analysts’ expectations of a 4 per cent rise. However, many investors have become concerned about whether the pace of growth can be sustained. Structural shifts in the Chinese economy as it builds its services sector will also reduce steel demand over time, according to Tom Price, analyst at Liberum. “Most of the sectors that use steel — property and infrastructure — are already built out,” he said.China’s steel production last year fell 2 per cent to 1.01bn tonnes, according to the World Steel Association, partly due to government-mandated production cuts.Erik Hedborg, an iron ore analyst at consultancy Cru, said weak demand in South Korea and Japan — where a shortage of semiconductors has slowed down auto production — has also contributed to the falling iron ore prices across Asia.“We are in a normalisation period” following several years of relatively high prices, said Hedborg. “We expect iron ore prices will go below $100 this year but there is also a limit to the downside.”Inside China, a campaign by the National Development and Reform Commission to push down iron ore prices has also had an impact, although it is not the main driver of the fall, according to market participants.A source close to the NDRC said it was bearish on the outlook for iron ore, and expected China’s steel demand to peak soon. “The demand is facing a crash,” the person said.In early March the NDRC published cautionary statements blaming “market speculation” for pushing up prices, and in April it warned futures traders against “hyping” iron ore prices, saying it would be stepping up its supervision of the market.“Greater scrutiny by the National Development and Reform Commission on iron ore prices has also impacted the market,” said Siew Hua Seah, head of Argus Ferrous Markets, noting that trading companies had been warned by NDRC not to “hoard” commodities and drive up prices.For mining companies such as Rio Tinto, BHP and Vale that sell iron ore to China, their production is still comfortably profitable at current prices.Rio’s chief executive Jakob Stausholm said he was “not too worried” about the drop in prices.“What you’ve seen in the last few weeks is that a number of steel mills have taken the opportunity to make a little shutdown,” he said, in response to questions at Rio’s annual shareholder meeting on May 4. “There might be a little bit less use for iron ore for now, but that might come back in a month or two.” More

SYDNEY (Reuters) -Australia’s Labor government boasted the first budget surplus in 15 years on Tuesday, as strong jobs growth and bumper mining profits swelled its coffers, but it will quickly be swallowed up by spending on everything from health to energy and defence.In his second budget since winning power in May last year, Treasurer Jim Chalmers also announced billions in cost-of-living relief aimed at lowering power bills and consumer prices in a helping hand to the Reserve Bank of Australia’s (RBA) fight against inflation.”Providing responsible, targeted relief is the number one priority in our Budget,” Chalmers told lawmakers, while also lauding the improvement in the budget bottom line.”This Budget, we’ve returned 82% of the extra revenue windfall that’s largely come from lower unemployment, stronger jobs and wages growth, and higher prices for key exports.”The highlight was a projected A$4.2 billion ($2.85 billion)surplus for the year to June 2023, the first since 2007/08 and a huge turnaround from the A$37 billion shortfall forecast last October.The former Liberal National government came tantalisingly close to a surplus in 2019, only for COVID-19 to blow a pandemic-sized hole in the accounts and lift the deficit to a record A$134 billion.The latest improvement owes much to a surprisingly strong labour market, which has taken unemployment to near 50-year lows of 3.5% and boosted income tax while curbing welfare payments.High prices for Australia’s commodity exports have also delivered a windfall to mining profits, and thus tax receipts, though prices are now well off their peaks.The government also raised its long-term commodity price assumptions in the budget, which is expected to contribute billions of dollars in extra revenues.”The government’s commitment to fiscal discipline, such as saving revenue upsides, remains critical to our ‘AAA’ rating on Australia as long-term challenges linger,” said Anthony Walker, a director at S&P Global (NYSE:SPGI) Ratings.Walker believed the revised commodity price projections were still conservative.”A sharp slowdown in economic activity that weakens the general government budget, causing debt and servicing costs to rise, could pressure the ‘AAA’ rating,” he added.SPENDING PRESSURESChalmers also expects the domestic economy to brake to just 1.25% in 2023/24 from 3.25% this fiscal year, in large part due to a painful 375-basis-points of rate rises from the RBA.That tightening should have the desired impact on inflation, which Chalmers sees slowing to 3.25% by mid-2024, down from the current blistering 7.0% pace. Treasury estimates its relief package for energy bills alone will cut 0.75 percentage points from consumer price inflation in 2023/24.Higher interest rates, however, have sharply raised the cost of funding the government’s near A$1 trillion in debt, with debt repayments the fastest growing cost in the accounts.The government also announced reforms to its immigration system to fill critical labour shortages, projecting that net overseas migration will reach 400,000 arrivals for the current fiscal year and 315,000 next year.There are plenty of other demands on the public purse. Annual spending on hospitals and aged care is seen rising by 6% or more every year for the next decade, while interest payments are up almost 9% and disability payments 10%.Australia will invest A$2 billion to scale up development of its renewable hydrogen industry, while defence is set for the biggest increase since World War Two amid plans to spend A$368 billion out to the 2050’s on nuclear powered submarines from the UK and United States.All of which means the budget will soon be back in the red, with Chalmers forecasting deficits of A$14 billion in 2023/24 and A$35 billion the year after. As surpluses go, this is very much a one-off.($1 = 1.4743 Australian dollars) More