Written Commentary
Escalating Persian Gulf shipping attacks dominate as China inflation and Japan monthly Tankan are digested on otherwise light day for data; EIA Short-Term Energy Outlook, StatCan grain and oilseeds inventories in view for commodities.
- China: Upside miss on CPI and PPI all supply-related; underlying measures continue to point to very weak domestic demand.
- Rates and FX markets face conundrum on which countries suffer most from persistently high energy prices.
- Recording of today’s Gulf Intelligence Daily Energy Podcast YouTube: LIVE: Daily Energy Markets Podcast
EVENTS PREVIEW
Energy Risks Front and Centre
Escalating attacks on shipping in the Persian Gulf and the resultant upward pressure on oil and other energy prices remain the focal point.
A Sparse Data Calendar
The regular run of macro data and events is quite light, with China’s inflation indicators, a robust Japan monthly Tankan to digest, and nothing of great significance ahead, given that ECB’s Lagarde will not be talking about monetary policy ahead of tomorrow’s policy meeting, though the US Treasury will begin its expanded buybacks today.
Navigating a Complex Market Environment
Rates and FX markets are facing an ever more complex environment, with the risks of high energy prices spilling over more broadly in inflation terms, but in turn also increasing the risks of growing headwinds to growth and demand destruction.
In a multipolar world with geopolitical and military tensions remaining high, where is the safe haven, which countries are better placed to contend with high energy prices, and which are most vulnerable to a bout of risk off selling in equities, above all AI/Tech related stocks, as interest rates rise, and where are the largest threats to financial stability?
Real rather than interest rates will play a major role, but leveraged positioning and corporate refinancing risks will also be a key determinant (the latter inevitably favouring the USD given that dollar denominated debt and the consequent demand for USD far outweighs any other currency). The latter also contends with heightened seasonal risk, as there is typically a rush of corporate issuance after the US Labour Day holiday.
Oil and Agriculture Reports Take the Stage
Be that as it may, the commodities space has the first of this week’s monthly oil market reports via way of the US EIA’s Short-Term Energy Outlook (STEO), along with the first of the run of major agri reports with StatCan’s report on grain and oilseeds inventories.
BoE Speakers Highlight Inflation Risks
While the focus in the UK remains on politics, and how new PM Burnham can finance his ambitious plans to stimulate the economy, yesterday’s MPC testimony saw a notable shift from both Bailey and Ramsden in terms of highlighting rising inflation risks, which shifts the balance of risks on rates somewhat to the upside.
** China – August CPI, PPI **
While PPI and core CPI came in above expectations at 3.8% y/y and 1.0% y/y respectively, with headline CPI rising in line with forecasts to 0.8% y/y from 0.5%, this was all supply-side driven (energy above all, but also AI-related demand). As can be seen in the attached table of contributions to this month’s CPI, major categories such as Food, Housing, Cars and Durable Goods all acted to constrain the rise and testify to continued weakness in domestic demand. Even the slight 0.1 ppt uptick in Services CPI to 0.8% y/y was paced by travel/airfares, i.e. energy.
Per se, the data implies the need for further PBoC easing, though as the August Credit aggregates data due early this week or next will show, private sector credit demand remains woeful as consumer and business confidence remains very low; a further small cut in rates is not going to change that, only fiscal and regulatory measures might.
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