As the strong U.S. dollar retreated from its highs and expectations of a slowdown in interest rate hikes by the Federal Reserve in December increased, the decline in commodity prices slowed down significantly. Among them, cyclical commodities such as crude oil and basic metals saw a relatively obvious rebound, such as WTI crude oil. The December contract rebounded to $88/barrel from $76/barrel at the end of September. Suppressed by rising U.S. dollar real interest rates, the rebound in gold and silver prices has been relatively weak.
Looking forward to the market outlook, we believe that the short-term decline in commodities may have slowed down. However, due to the economic downturn caused by monetary tightening in European and American countries, the economic downturn cycle has just begun. The support of low inventory may encounter the collapse of commodity demand, entering a storage accumulation cycle, and the decline in commodities It may not be easy to reverse. It is worth noting that the improvement of China’s economy will have a weakening effect on the collapse of demand for overseas commodities, which will lead to twists and turns in the decline of cyclical commodities such as crude oil. In response to the mild decline in U.S. inflation, the rebound in gold and silver prices is also under pressure.
Market trading logic keeps switching between stagflation and recession
From an inflation perspective, inflation in most economies around the world has only declined moderately. The energy crisis, wage-inflation spiral and rising service prices all mean that it is difficult for the global high-inflation environment to return to the previous era of low inflation that lasted for more than 40 years. In the United States, data from the U.S. Department of Commerce showed that the U.S. PCE price index increased by 6.2% year-on-year in September, the same as the previous value, and the core PCE price index increased by 5.15% year-on-year in September, continuing to accelerate from 4.9% in August. Labor costs continued to accelerate upward in September and personal spending remained resilient, which means that U.S. inflation fell very slowly.
In Europe, affected by the surge in energy prices, the Eurozone’s adjusted CPI rose 10.7% year-on-year in October, hitting a record high. Energy and food once again pushed up inflation. In October, energy prices in the Eurozone rose 41.9% year-on-year, up 40.8% year-on-year from September, and continued to accelerate. The core CPI excluding energy and food reached a new high, with a year-on-year increase of 5% in October, continuing to accelerate from 4.8% in September and reaching a new high.
Therefore, the process of monetary tightening in economies such as Europe and the United States will not end soon. Although some Federal Reserve officials have recently released signals of slowing down interest rate increases, this does not mean that they will stop raising interest rates. The Federal Reserve may raise interest rates again by 75 basis points at its November interest rate meeting. On November 1, European Central Bank President Christine Lagarde said in an interview with the media that even if the risk of economic recession in the euro zone increases, the European Central Bank must continue to raise interest rates to combat inflation.
Judging from U.S. economic data, real estate has cooled down significantly, and GDP in the third quarter turned positive quarter-on-quarter and exceeded expectations, mainly due to net exports. Compared with second-quarter GDP, the improvement in third-quarter GDP mainly reflected the narrowing of the decline in private inventory investment, the rise in government spending, and the accelerated growth of non-residential fixed investment. However, this part of the growth was offset by the sharp decline in residential fixed investment and consumer spending. offset by the deceleration. The slowdown in the growth rate of consumer spending, the main engine of the U.S. economy, means that the rebound in U.S. economic growth from the previous quarter may be short-lived. The U.S. economic growth will decline again in the fourth quarter, and the U.S. economy may experience negative growth again from the previous quarter. In addition, residential investment, which reflects domestic demand in the U.S. economy, continues to decline amid the cooling real estate market, with U.S. new home sales and existing home sales declining for several consecutive months.
In Europe, with the European Union setting a price ceiling on Russian oil and natural gas imports and Russia threatening to cut off all oil and gas supply due to the energy crisis, the European Central Bank is raising interest rates in a “hawkish” way to combat inflation, which has worsened the economic situation in the euro zone. The Purchasing Managers’ Index (PMI) of Europe’s manufacturing and service industries has both fallen below the 50 line of expansion and contraction to the contraction range. In the third quarter, the GDP of 19 euro zone countries increased by 0.2% month-on-month, a significant decrease from the previous value of 0.8%.
Due to high inflation and continued weakness in European and American economic indicators, this means that the economy is in a stagflation cycle or is about to enter a recession cycle, and market trading logic repeatedly switches between the two. Therefore, whether the market is trading stagflation or recession, for cyclical commodities such as crude oil, demand decline is inevitable, not to mention that the purpose of monetary tightening in major overseas economies is to cool down the demand side in order to curb inflation through economic slowdown. Any rebound in commodity prices is short-lived.
China’s economy is stabilizing and improving, easing pressure from collapsing overseas demand for some commodities
Judging from the economic data released for the third quarter, China’s economy is stable and improving. Data released by the National Bureau of Statistics show that according to preliminary calculations, the GDP in the first three quarters was 87.0269 billion yuan, a year-on-year increase of 3.0% at constant prices, 0.5 percentage points faster than the first half of the year.
Investment has clearly played a role in stabilizing growth. As the effectiveness of the economic stabilization package and follow-up policies continues to be released, the construction of major projects is accelerated, and the scale of effective investment continues to expand. In the first three quarters of 2022, gross capital formation contributed 26.7% to economic growth, slightly higher than the 23.6% in the same period in 2019 before the epidemic; it drove GDP growth by 0.8 percentage points, the same as the first half of the year. Among them, total capital formation contributed 20.2% to economic growth in the third quarter and 66.4% in the second quarter; it drove GDP growth by 0.8 percentage points, which was better than the 0.3 percentage point in the second quarter.
To sum up, we believe that global commodity prices will also face the pressure of demand collapse caused by economic contraction in the future. If there is accumulation of inventory, the support of low inventory at this stage for commodity prices will be significantly weakened. AlthoughThere are still uncertainties on the supply side. For example, crude oil supply may face the impact of the Russian oil ban that takes effect in December. However, the demand decline is still in the early stages and will continue to be exposed in the future.
Overseas inflation is falling slowly, and the general environment of monetary tightening is not enough to change the cumulative pressure on libraries caused by the collapse of future demand. Therefore, for cyclical commodities such as crude oil, the demand shock has not yet passed, and supply concerns are a periodic benefit. The prices of precious metals such as gold and silver continue to be suppressed by the rising real interest rates of the US dollar, and the time for strategic allocation by bulls has not yet come. Investors can use CME Group’s COMEX gold futures (GC) and WTI crude oil futures (CL) to hedge against the risk of falling after a rebound, while domestic investors can use SHFE gold futures and Shanghai International Energy Trading Center’s crude oil futures to hedge against downside risks. risks of.
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