In today’s briefing:
- Double Crosshairs Haunt Wheat; Geopolitics and El Niño Impacts Global Staple
- Asset Allocation Watch: Best not hope for cuts
- The Latest IMF Study on Inflation Calls for Even More Rate Hikes!
- Recession Nugget: What’s the deal with GDP and GDI
- EA: Disinflation Not Petering Out
- The Energy Cable #38: Time to switch exposures in Energy space?
Double Crosshairs Haunt Wheat; Geopolitics and El Niño Impacts Global Staple
- Global wheat trade is imbalanced with few exporters and many importers. This means a few nations’ trade policies affect supply during shortages as they restrict exports to prioritize domestic needs.
- El Niño generally causes wheat production to decline among key exporters as well as most importers. This increases the likelihood of shortages in the wheat export market.
- Currently diminished global wheat inventories increase the likelihood of supply shocks and price surges in global wheat markets.
Asset Allocation Watch: Best not hope for cuts
- Recent developments in components of the inflation basket leave us less convinced of the path ahead for the Fed but judging by funds futures, the market is now pricing in cuts already by April 2024.
- Energy (and oil in particular) could easily wrongfoot these expectations.
- Our estimate is for a deficit just above 2mn barrels through the fourth quarter, which is enough to bring oil prices another 30% higher based on historical data.
The Latest IMF Study on Inflation Calls for Even More Rate Hikes!
- While US headline inflation is returning to pre-Covid levels faster than average, the risks of premature celebrations are high!
- In the Eurozone, headline inflation is nowhere near pre-shock levels, and our inflation outlook suggests it may well take another year now that oil prices are spiking.
- Central banks have no choice but to accept stagflation, or worse, keeping rates higher for longer, which is NOT reflected in stock markets.
Recession Nugget: What’s the deal with GDP and GDI
- With the spread between GDI and GDP reaching historical levels we ought to dig into the numbers once again to figure out if this is just statistical non-sense, or if we have got a good reason to be worried for the American economy.
- Research points towards GDI being the most indicative variable of the two, and the spread is often seen as a recession indicator – remember that households make up ⅔ of GDP
- But there is a (small) chance that the difference between the 2 is simply a statistical measurement error, which of course will grow more or less proportionally with the size of GDP/GDI
EA: Disinflation Not Petering Out
- The flash EA HICP inflation rate was marginally trimmed in August’s final print, causing it to round lower from 5.24%, while the ex-tobacco rate still printed at 5.2%.
- Resurgent petrol prices prevented inflation from slowing by more, but powerful base effects in September should re-establish the steep trend decline.
- Underlying inflation continues slowing to the extent that the monthly impulse is no longer significantly above target, which should spare the ECB from hiking again.
The Energy Cable #38: Time to switch exposures in Energy space?
- Warren and 3Fourteen Research has been bang on with their bullish crude trade posted in July, which has returned approx. 33%
- On the other side of the energy space, Natural Gas is starting to look like a possible substitute for a long crude position, while the uranium and nuclear trade could be running on fumes.
- We had headline numbers in CPI and PPI jump on the back of a strong month in crude and we also note that the nuclear sector is flying higher with Sprott’s physical ETF being up 13% last week on the back of FOMO and political acceptance in nuclear space.
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