2022-11-03
Market Outlook
From the west, as central banks continue to tighten monetary policies in the fourth quarter of 2022 the effects of inflationary pressures are projected to decrease. Other than the policies, factors that may impede the growth of the economy include the European energy crisis and demand/supply shocks. Regardless, it is still too early to speculate on the extent of the decline in economic growth, inflation, and the shift in FED’s monetary policy stance.
On the other hand, for the Chinese market, various supply-side and low inventory issues continue to persist.
- Ferrous Metal Sector generally fell in price. (Finished products faced a smaller decline than raw materials.)
- Non-Ferrous Metals benefitted from the supply constraints and prices increased. (except for tin.)
- Chemical Sector generally fell, while weaker demand continued to suppress valuations.
- Energy, Crude oil, LPG, and low-sulphur fuel oil prices increased.
- Tight demand and supply for crude oil continue to sustain its prices.
Secondly, the slowdown in economic growth is unlikely to lead to any improvements in industrial products.
Overall, while the demand and supply balance sheet of the Chinese economy remains relatively healthy in the short term, recovery in the finished product markets is slow, this may cause the trends and statistical predictions of the products to diverge and remain volatile.
Metals (Ferrous and Non-Ferrous)
Ferrous Metal
For the ferrous metal industry, weak supply and demand are expected to continue, causing negative feedback in the raw materials industry.
Under the circumstances of slow demand growth, steel mills have reduced production and reduced finished product inventories. As steel mills face losses, they will no longer be able to sustain operations at a high level throughout the year, Additionally, the decline in daily molten iron output will also lead to a decrease of demand in raw materials.
Soybean Meal Futures
Russia announced on Saturday that Ukraine had used drones to attack the Russian fleet on the Crimean Peninsula, followed by an indefinite suspension of the Black Sea port shipping agreement. Similarly, Reuter’s news reports that Ukraine’s infrastructure ministry reports 218 cargo ships affected by congestion and impassability, of which, 22 carrying agricultural products are waiting to leave Ukrainian ports.
Ukraine is the world’s most important grain producer and exporter, since the outbreak of the Russian-Ukrainian conflict in February, Ukraine’s exports have plummeted. On July 22, the United Nations and Turkey signed an agreement that led to the export of 9 million tons of agricultural products from Ukraine. Nonetheless, the series of events has led to market fears, international market prices continue to fluctuate drastically, with the US wheat and US corn rising more than 5% and 2% respectively on Monday.
U.S soybean prices also stand to benefit from the conflict due to the increased price, but the price increase was much smaller than that of other products such as cereals. Though Ukraine is also an important export of sunflower and rapeseed products, the country does not have a direct impact on beans-related products.
Alternatively, the soybean market attention has shifted to South America, and Brazil’s soybean planting has been doing well. If South American yield expectations are fulfilled, US-based soybeans will be under pressure.
November soybean arrivals fell short of expectations due to U.S. inland waterway transportation problems, a recently updated forecast for imported soybeans showed 7.9 million mt arrivals in November, down from a previous estimate of 9.6 million mt and 8.57 million mt in the same period last year. Based on this, it may be difficult for domestic soybean meal stocks to recover effectively in November, and the situation of low inventory and high basis will continue in the short term.
Macro-economic impacts
On one hand, high inflation, and high-interest rates signify that the US demand is on the edge of decline. The US GDP recorded an annualized rate of 2.6% in the third quarter, though it exceeded market expectations, the rate is not ideal.
Figure 3: Balance of Trade contributes the most to America’s GDP
Figure 4: Market Manufacturing, services PMI weakens
To elaborate, more factors indicate the weak domestic demand in the United States. These factors include:
- Export growth remained high while import growth slowed sharply
- Individual consumption margins weakened
- Private Fixed Asset Investment recorded negative growth for two consecutive quarters
- US Markit manufacturing and services PMI fell in October and fell short of market expectations, additionally, the new order segments have hindered trade, resulting in the 28-month low of manufacturing PMI. (Figure 4)
On the other hand, inflation has generally fallen though it is still high. The US CPI was 8.2% year-on-year in September, higher than market expectations due to rising rents and related segments, pushing the core inflation higher. However, high-interest rates have similarly accelerated the fall in US home prices as it will still take some time for home prices to be redirected toward housing rents.
There will likely be increased volatility in the market in the near term, while FED’s monetary policies may face the pressure of choosing between inflation and demand.
Moreover, while the interest rate hike of 75 basis points in November was a high-probability event, the next crucial meeting is in December. This FED meeting in December is an important window of change as the policy can cause changes in inflation, non-farm payrolls, and other economic data, which will in turn affect the pace of interest rate hikes and increase market volatility.
From a fundamental point of view, despite the recessionary pressure, it is expected that the next 10Y US treasury yields may have room to fall. However, whether the dollar index can maintain strength will depend on when Fed’s monetary policy inflection point will appear.
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