By Ulf Bergman
Macro/Geopolitics
The case for another out-sized interest rate hike in the US continues to strengthen. Producer prices in the world’s largest economy rose by more than expected last month. Beyond making a case for an additional 75 basis point increase more compelling, the reading pointed towards a rebound in the PPI following two months of declines and highlighted the challenges the US central bank is facing in its attempts to moderate the country’s inflationary pressures. Hence, more large interest rate hikes may be required, increasing the risk of the US economy entering a recession.
Following a speech last week where the head of the International Monetary Fund warned that the global economy faced mounting challenges amid geopolitical fragmentation and increasing disruptions from extreme weather events, the organisation have downgraded its projections for the global growth rates next year. The IMF now expects the world GDP to expand by 2.7 per cent in 2023, down from 2.9 per cent in July, amid rising fuel and food prices. As part of the downward revisions, the fund also lowered its expectations for the world’s two most populous nations this year. The Indian economy is expected to expand by 6.8 per cent during the current financial year, which ends in March next year, following a downward adjustment of 0.6 percentage points. China also saw a modest revision of the current year’s projections, with growth expected to reach 3.2 per cent, a far cry from the official target of around 5.5 per cent.
Commodity Markets
Crude oil prices continued to slide during yesterday’s session, following last week’s gains. A downgrade by OPEC+ of the demand outlook for 2022 and 2023 contributed to weaker prices. The Brent futures retreated by two per cent and ended Thursday’s session at 92.45 dollars per barrel. After three days of declines, the contracts have gained some ground during today’s session and are trading around 93 dollars.
European natural gas prices maintained Tuesday’s positive momentum, with the front-month futures settling at just above 160 euros per megawatt-hour on Wednesday. The contracts initially continued to build on yesterday’s 2.2 per cent advance during today’s session, with gains of around 5.5 per cent amid renewed energy supply concerns following disruptions to South African coal exports. However, momentum has since changed, and the contracts have shed some two per cent.
Thermal coal futures continued to gain ground during Wednesday’s trading, as a strike in South Africa curtailed its shipments of the dirtiest of fossil fuels. The Newcastle futures for delivery in November advanced by five per cent to 408 dollars per tonne, while the contracts for delivery in North-West Europe next month surged by 7.7 per cent to 283 dollars per tonne.
Iron ore futures trading in Singapore continued to retreat from Monday’s gains yesterday. The November contracts ended Wednesday’s session at 93.80 dollars per tonne, following a 0.8 per cent loss for the day. Today's trading has seen additional losses, with the contracts trading around two per cent lower.
The base metals had a mixed session on Wednesday, with aluminium providing the standout performance. The futures contracts for copper and zinc trading at the London Metal Exchange ended yesterday’s session 0.7 per cent lower. In contrast, the nickel futures advanced by nearly one per cent. However, the aluminium futures had the strongest day, with the contracts closing 3.1 per cent higher following renewed warnings that shrinking profit margins for the world’s smelters will put pressure on global supplies.
An unexpected rise in US inventories contributed to the wheat futures trading in Chicago retreating by 2.1 per cent yesterday. According to the latest WASDA report, US wheat exports are on course for a 50-year low as falling water levels in the Mississippi River have hampered shipments. In contrast, the soybeans contracts advanced by 1.4 per cent following a downgrade to USDA’s production projections. The corn futures ended Wednesday's trading session unchanged.
Freight Markets
The Baltic Exchange’s dry bulk freight indices saw losses across the board on Wednesday, with the larger tonnage segments seeing the largest declines. The headline Baltic Dry Index retreated by 1.6 per cent, following losses for the Capesize and Panamax indices in excess of two per cent amid rising tonnage supplies. The smaller vessels fared somewhat better, with losses of less than one per cent.
In contrast, the Baltic’s gauges for the tanker freight rates generally had a good day. The indicator for the dirty tankers advanced by 1.1 per cent, while their clean siblings gained 1.4 per cent. According to the Baltic Exchange, the freight rates for the LPG carriers increased by 3.9 per cent. The LNG tankers were yesterday’s laggards, with their index remaining unchanged. Still, freight rates in the sector have risen by almost 30 per cent in the last week.
The View from the Shipfix Desk
In the latest WASDA report, the US Department of Agriculture reports that US wheat exports have been severely affected by the low water levels in the Mississippi River. The barge traffic on the river has not been able to ship normal quantities to the country’s export terminals. As a result, inventory levels for wheat have been building faster than many analysts had expected, putting pressure on futures prices.
The difficulties in getting the latest harvest to the country’s export ports have been reflected in cargo order volumes, which were well below their normal seasonal levels in September. However, volumes month-to-date suggest that a rebound is underway and US wheat exports look set to recover.
Capesize freight rates have staged a remarkable recovery since the beginning of September, following an abysmal three months. Still, despite the rapid rebound, daily freight rates remain well below what has been observed during the same period in recent years. Hence, if history provides any guidance, there could be an additional upside, but rising economic and geopolitical headwinds could derail such assumptions.
Data Source: Shipfix