- The Fed’s hiking strategy is creating the demand destruction needed to induce a recession and kill off inflation.
- The weaker global economy is leading to an oil surplus.
- Lower capital expenditure is leading to falling manufacturing output.
Just because you’re paranoid doesn’t mean they’re not out to get you.
You’re paranoid… and you’re right to be.
Jay Powell and his minions at the Eccles Building are coming for the economy… and may have bagged their prize already.
But you wouldn’t know it by their talk.
The entire FOMC still wants to keep on keeping on… raising rates, that is.
In this Freedom Financial Daily, I’ll take you through what’s happening.
Don’t let the stock market fool you.
The commodities markets are telling a far truer picture than equities.
Crudely Yours
The below chart puts into context the slowdown in crude.
We’ve seen prices weaken further in the physical market as floating storage remains elevated around the world.
There’s more downside risk to industrial activity as we move through the end of the year and into Q1’23.
This will lead to more degradation on diesel demand, especially in Asia.
The slowdown in Europe, U.S., and China takes time to work through the supply chain.
We can already see there is a negative move coming.
This will weigh on diesel/MGO (Marine gasoil) further. But it’s already pulling down industrial activity, which consumes a large part of diesel.
India’s exports took a big turn down, and we think that pressure remains and weigh on internal demand there as well.
CAPEX Down
The capital expenditure (CAPEX) forward outlook has worsened again, which ties closely to companies tapping their credit lines.
It supports our view that diesel and inherent industrial demand will weaken further and put more downside pressure on crude demand.
The OECD Leading Indicators have turned steeper into contraction resulting in more pressure on global trade and underlying demand.
The new export orders are showing how the cracks are growing, and it is hitting the global economy at a bigger level.
Exports and Shipping Hurting
Key export nations are seeing a marked shift lower in activity, which will weigh on underlying demand.
Another key problem is the slowdown will continue well into next year, based on all the long lead indicators.
The Freightos Baltic Index from China/East Asia to the US East/West coasts increased at the beginning of November.
But SONAR’s TEU Volume/Capacity indices were signaling that this attempt by carriers at a General Rate Increase (GRI) would be unsuccessful.
That shows demand for volume is dropping and hence, prices will drop.
As you can see in the chart below, the FBXD dropped another $406 to $1,919 per 40-foot container (FEU) on the China/East Asia to the US West Coast Lane. That’s a new low for 2022.
For perspective, this same lane was priced at $1,942 per FEU on Nov. 1st, 2016.
That means prices bounced up and down for six years, even in this inflationary environment.
All the data shows how everything is being driven lower on the pricing and demand side.
How will this pain manifest itself?
For consumers who’ve moderated their purchases over the years and saved, they should have a field day buying goods at lower prices. However, those are the few.
Most consumers will have shot their bolt already, as we’ve got the highest credit card balances on record.
These consumers will have to pare back their purchases to maintain their standard of living.
On balance, this points to lower prices, not higher ones, as demand destruction takes root.
Volumes are dropping through a floor around the world. We’re getting more cautious commentary from key distributors, such as Target, Maersk, Amazon, and other consumer-facing entities.
The consumer has remained somewhat resilient over the last few months, but the shift has started to accelerate.
From the Target earnings call:
As we look specifically at third quarter results, they demonstrate how our business continues to serve our guests even in the face of an increasingly challenging backdrop. Because of a deepening level of trust we’ve established with our guests over the last several years, our topline continues to benefit from growth in guest traffic and unit share gains across all our core categories. This is particularly notable, as consumers are showing increasing signs of stress and pulling back from discretionary purchases. And it reinforces the value of having a balanced multi-category portfolio, which allows us to satisfy our guests’ ever-changing wants and needs.
More specifically, consumers are feeling increasing levels of stress, driven by persistently high inflation, rapidly rising interest rates, and an elevated sense of uncertainty about their economic prospects. With higher rates of inflation continuing to erode their purchasing power, many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets. But for many consumers, those options are starting to run out. As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responsive to promotions and more hesitant to purchase at full price.
Retail Sales
When we look at retail sales, the volumes adjusted for inflation remain flat and are starting to trend down a bit more.
Ace technical analyst Charlie Bilello tweeted this chart, along with this caption:
In nominal terms, US Retail Sales still appear to be booming, rising 7.5% over the last year & hitting a new high in October.
But after adjusting for inflation, the story changes. Real Retail Sales peaked in March 2021 & are down 0.3% over the last year.
Another look at the control group shows things have remained flat.
But as pressure mounts (in line with what Target outlined) we expect to see a bigger contraction as we head through the rest of the year. The biggest contraction is likely to be in Q1’23.
The below breakdown of inflation helps show where inflation keeps showing up. Many of the key ones impacting the consumer aren’t going anywhere.
Winter is just starting, yet we already see electricity prices spike.
This isn’t going to slowdown as baseload power falls short and demand grinds higher.
The cost to the consumer is moving in one dangerous direction.
The most recent leading indicator for the U.S. shows growing pain as the data shows a move lower.
If you look at the last time we were at these levels, we were either in a recession or rapidly moving into one.
Companies are also taping their credit lines at an accelerating rate as the bond market closes or becomes too expensive to access.
These types of shifts are leading indicators of a company’s willingness to hire, invest, deploy CAPEX, and spend.
This is something that happens when companies are looking to tighten belts.
That’s your update for today.
Have a great day ahead.
Kind regards,
Freedom Financial News
