Emerging Markets Slow; Global Wages and Credit Impulse Fall

Emerging Markets Slow; Global Wages and Credit Impulse Fall

Freedom Financial Archive | Originally posted Jan 14, 2023
  • Global Manufacturing PMI is falling off a cliff.
  • Inflation finally takes a bite out of global paychecks.
  • A receding global credit impulse pulls an earnings recession forward.

Many emerging market countries kicked off the new year by raising gasoline and diesel prices.

Usually, they’ll subsidize their fuel prices.

As we moved into 2023, we have seen nations starting to “mark to market” fuel prices to the current oil price.

As a result, emerging markets are going to struggle more in 2023 as manufacturing slows, central banks hike rates, and fiscal support diminishes.

The leading indicators for manufacturing all point to additional headwinds when we factor in new orders and new export business.

These are important pillars for all markets, but more so for the emerging markets, which tend to be export-oriented economies.

As you can see in the chart below, global manufacturing PMI, including each of its components of consumer, intermediate, and investment goods, continues off a cliff.

The world dumped an absurd amount of liquidity into the market from 2020-2022, but we have been seeing “easy” monetary policy since 2008.

This has culminated with the largest synchronized rate rising cycle in history… and there’s more pain ahead.

All of this points to an expensive cost of capital, reduced CAPEX, and ultimately a drop in diesel demand.

The problem is this: as demand wanes so does supply, and which one wins out for the month or quarter will vary wildly.

European economic activity is set to slow further as rates move higher across the region. The ECB will push rates higher, and all of the ARM (adjustable-rate mortgages) will “re-rate” higher hitting the wealthy in the region.

It may be hard for Americans to understand this, but European banks don’t offer 30-year fixed mortgages. For example, they offer mortgages such as 6-month Euribor whose rates adjust every six months.

Even as demand slows, we’re seeing more run cuts from European refiners all while CPC flows move back to the highs.

Observed flows of Caspian CPC Blend crude from the terminal near Russia’s Black Sea port of Novorossiysk rose last month to the most since February, with shipments to the Mediterranean at the highest in more than four years.

  • About 5.88m tons, or 1.5m b/d, of CPC Blend were lifted in December, according to port agent reports and ship-tracking data compiled by Bloomberg
    • The daily volume was the highest since February, and compared with 5.67m tons, or 1.49m b/d, in November.

CPC and Libyan flows will remain elevated throughout Q1 and help supplement the loss of Russian crude as demand diminishes in the background.

We expect Brent to trade range bound with the first line of support around $82, but a lot of staying power between $78.50-$80. It’s unlikely to make any real sustained move above $86 throughout January or Q1’23. The buying levels would be sub-$80, and we would be sellers above $85.

China is sitting on a significant amount of crude in storage, and they have already been buying up a lot of cargoes over the last 6 weeks or so.

We expect to see additional pressure on purchases in January, which will push physical prices lower and put Brent into a fairly tight range.

WTI (West Texas Intermediate) will suffer a similar fate. There’s stronger support at $74, but it will likely hold $76 in the near term. We don’t see any sustained moves above $80. So, we would be buyers at $74 and sellers above $80 to capture the volatility.

Volatility is going to be the name of the game as we have bullish and bearish cases jockeying for position.

Even as the “micro” has some bullish backdrops, such as a potential OPEC+ cut, the macro picture continues to deteriorate from an economic and trade perspective.

Two charts that I think are very important is the global shift in “real wages.” Paychecks in 2022 fell for the first time since at least 2006. It’s unlikely to get any better as we usher in stagnation for the next few quarters.

This is all happening as credit impulses implode around the world and drag down global GDP with it.

These two key components point to a slowing consumer, slashed corporate CAPEX, and a broad slowdown.

The recession is now upon us, and the macro will keep crude prices pinned lower with a ceiling.

The bullish side (the floor) remains the lack of new supply coming to market. And with a rise in the cost of capital and the new “windfall oil taxes,” we aren’t going to get any new supply anytime soon!

As liquidity is drained from the market, we’re going to see an earnings recession only gain speed throughout Q1’23.

You’re all caught up for now.

Have a wonderful weekend!

Kind regards,

Freedom Financial News