Sat, Dec 04, 2021 @ 16:36 GMT
HomeContributorsFundamental AnalysisIt's Wet At The Coal Face

It’s Wet At The Coal Face

Despite China’s central government ordering domestic coal producers to increase production to alleviate energy shortages in mainland China, obstacles keep on appearing. Production in one of China’s coal production hubs, Shanxi, has been severely disrupted by heavy rains forcing the suspension of output from 60 coal mines, Bloomberg reports. Wet weather has also been disrupting extraction at key supplier Indonesia of late as well. Unsurprisingly oil prices are up 1.0% in early Asia, with natural gas futures rising by 2.0%, while font month iron ore futures in Singapore (steel making uses a lot of coal) have leapt higher by over 4.0%.

Reuters is also reporting that northern Indian states have been suffering electricity outages as coal supplies there remain exceedingly tight. Friday’s RBI policy decision left rates unchanged, but the central bank announced it would stop its bond-buying programme that isn’t called quantitative easing. Ostensibly bullish for the Indian Rupee, pressure on the INR continued anyway, and I suspect energy is at its core.

Mainland China and India are the no. 1 and 2 largest users of coal. Meanwhile, Russia keeps “subtly” tying more gas supply to Europe with certifying Nord Stream 2 and OPEC+ have shown no signs of wavering on previously agreed production targets. With winter approaching in the northern hemisphere, none of this news is bearish for energy prices and oil is rightly higher in Asia today.

It also isn’t bearish for inflation either. Higher energy prices/shortages will inevitably make their way through global value chains in the form of rising prices and potentially in shortages of industrial and consumer goods. I for one, am particularly concerned about the knock-on effects on fertiliser production (which uses natural gas in the manufacturing process.) If global food production starts getting affected, either by shortages and/or much higher prices, things are going to start getting real.

All of this makes the constant blathering from central bankers around the world about inflation being “transitory” ring more and more hollow. If transitory inflation is now defined as being elevated by the last two or three years, what is sticky inflation? Two to three years sounds like more like half an economic cycle these days to me. Of course, much of the inflationary forces are due to pandemic disruptions and thus, out of the hands of central bankers. Some of it though, is a knock-on effect of the ham-fisted quantitative easing policies of the past decade and a bit, pimping up asset price appreciation to give the illusion of recovery, while sharply increasing economic and social inequality under the surface.

Stealing the future wealth creation of our children and NPV-ing to the present day via QE forever and zero percent rates to back stop growth today, had to be paid for eventually. Perhaps that time has come via inflation, which has been on holiday for nearly 20 years. The only bright spot is that the world actually needs a few years of high inflation to deflate the global debt mountain that all of those economics PhDs at the central bank of (insert name here), have enabled the financial system to create.

NFP misses consensus

The threat of inflation is likely one reason Wall Street didn’t endure a massive “taper-off” move on Friday after another Non-Farm Payroll shocker. Although the August data got a chunky upward revision to 366,000 jobs, the September print was only 194,000 jibs versus expectations of 500,000-plus, including from the author. As ever, a look under the bonnet is always a good idea once the initial headline reactions have passed. Private payrolls actually showed a healthy gain with government employment, particularly in education where schools are enduring a disrupted reopening. That and the leisure and hospitality sector continue to be the employment laggards, despite millions of jobs being available in the latter.

What saved the markets from a “taper-off” move was unemployment falling to 4.80% from 5.20%, led by a fall in participation rates. The Fed-engineered mother of all stock market rallies may have seen retirement pools bulge and early retirements thinning total workforce. Bulging personal savings and a disrupted return to school may also be stopping some workers from returning. That all points to wage inflation, not PPI inflation and US bond yields shot higher, the 10-year settling above 1.60% while equities fell, and the US dollar held its own. That left the Fed taper live for a December start in the minds of the markets and I shall not disagree. It appears that the US has a labour force problem and not a jobs problem. Transitory inflation? Hmmmm………..

South Korean and Taiwan markets are closed today, and it is a partial holiday in the United States although the stock market is open. South Korea looms as one of the region’s highlights though, with the Bank of Korea policy decision tomorrow. Markets are pricing an unchanged base rate of 0.75%; however there is a small chance that it might slip in a 0.25% hike which would boost the beleaguered won. Singapore’s MAS announces its semi-annual monetary policy outlook on Wednesday, but I am expecting no surprises with the MAS settings tilted solidly towards supporting the economic recovery.

Australia releases employment data on Thursday, usually good for some intra-day volatility. More attention will be focused on Sydney’s partial reopening today. It is a quiet data week for China with only CPI on Thursday to excite. Only a print well above 1.0% for September is likely to provoke a market reaction. Attention remains focused on Evergrande and its still suspended shares. Although it has slipped from the headlines, we can be sure this story has more to run.

The data calendar is thin in Europe today, but a slew of CPI releases from across the Eurozone in the second half of the week could reveal whether inflationary pressures seen elsewhere in the world, are washing up on Europe’s shores. The US also releases NFIB small business optimism tomorrow, important for its outlook on wages, hiring and also the effect of material shortages and/or price increases. The JOLTS job openings data should hold around 11 million vacancies and is one of the main reasons why Friday’s Non-Farms did not provoke a “taper-off” move. CPI on Wednesday will be closely watched in the context of the above before Retail Sales on Friday.

Finally, Q3 US earnings season starts this week, with the banking heavyweights due to report in the second half of the week. Their outlook for 2022, will arguably, have more market-moving potential than the data calendar this week.

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