Natural gas prices around the globe are elevated, and as the colder winter months in the Northern Hemisphere approach, prices will likely remain so. An unfolding potential crisis is most acute in the Eurozone where natural gas futures prices have increased over 500% in the past year, and conditions in the rest of the world are not much better. Calmer weather in Europe and thus lower wind turbine energy production has been cited as one reason for elevated prices, and rising demand for natural gas as a lower-carbon transitional fuel away from coal and oil is another. Unchecked, the higher price environment may lead to blackouts, heating shortages in colder regions, and forced plant shutdowns, and may exacerbate current and broader inflationary trends. Also, higher utility prices are effectively a tax on consumers (hitting lower wage earners the hardest) hastening an end to the global economic recovery that may be already moderating or even stalling in some parts of the world.
We are back, but maybe China is not. China’s purchasing manager index for exports has signaled a decline since April’s reading of 50.4 (a reading below 50 suggests a deterioration in conditions). This data series is interesting in the current inflation debate because it is a barometer of global trade and aggregate demand. If demand is weakening while headline consumer and industrial prices remain elevated, that suggests that the supply/demand balance is being dominated by supply-related issues. This could make sense given the numerous instances of supply chain bottlenecks, transportation issues, etc. that we have discussed and that continue to make headlines. Consequence for the markets — this may be another reason why the Fed may be dovish for longer. [chart courtesy Bloomberg LP (c) 2021]
This will be our last chart before Labor Day. The US Federal Reserve’s preferred measure of inflation, the YoY rate of change in the Personal Consumption Expenditure Index (PCE), has been exceeding its 2% target rate since April making investors concerned that we may be approaching a monetary tightening cycle. That fear was escalated by this week’s release of the Fed’s July 28-29th meeting minutes that indicated they may begin to wind down the current $120 billion monthly asset purchases by the end of this year or the beginning of 2022. The Fed has expressed its view that current inflation trends are transitory and are likely due to temporary factors such as supply chain bottlenecks and a strong rebound in demand from last year’s lull in consumption. As of June 30th, the current annual rate of the PCE was 3.54%, well above the Fed’s target, but in June 2020 the reading was 1.13%. Since the Fall of 2008 during the Financial Crisis, the PCE has been stubbornly below 2%, averaging 1.59%. Over that period of nearly 13 years, the PCE has been over 2% only in Q1 2012 and for most of 2018. Inflation has been undershooting for a long period leaving aggregate price levels far below the Fed’s ideal. This suggests to us that the Fed will likely tolerate inflation until the PCE normalizes.
Those participating in the frenzy in crypto-related investing may be in for some more downside pain in the months ahead as a bellwether, Bitcoin, has formed the notorious “death cross”, which is when the 50-day moving average falls below the 200-day. So far it is approaching nearly a 50% drop since its peak in mid-April. Technical analysis may be more useful in evaluating the merit of such investments that have no or little fundamental data on which to base a decision. Part of the rationale for investors to acquire positions in Bitcoin and other related investments lies in the idea of using them as a means of exchange and potentially as a store of value. The latter dimension has been gaining credibility as major central banks continue to pursue aggressive quantitative easing, effectively debasing their currencies to one degree or another. We cannot divine where the trend in cryto investing is headed in the intermediate term, but there is no denying that interest is growing. If recent history is any guide, investors who chose to hold these investments need to be prepared for further losses. The previous two times when death crosses were formed in 2018 and late 2019, losses surpassed 64% and 30%. Not for the faint of heart. [chart courtesy Bloomberg LP (c) 2021]