Australian dollar rides the energy panic

See the latest Australian dollar analysis here:

Macro Morning

DXY was up overnight as EUR fell:

The Australian dollar was strong anyway:

The key was energy. Oil exploded:

Thermal coal exploded:

LNG exploded:

Coal adds to Australian income but oil and gas do not. They basically offset one another in the terms of trade.

Base metals were soft and why wouldn’t they be. This energy shock is going to hammer the global economy:

EM stocks still look precarious:

The EM junk siren is howling a warning:

As Treasuries back up though the long end has slowed:

And stocks sold led by duration stocks:

Westpac has the wrap:

Event Wrap

US durable goods orders in August rose +1.8%m/m (est. +0.6%m/m, prior raised to +0.5%m/m from -0.1%m/m), with the ex-transport measure softer at +0.2%m/m (est. +0.5%m/m).  Supply constraints featured once again. The Dallas Fed manufacturing survey, at 4.6, missed expectations at 11.0 (prior 9.0). Lower new orders and outlook were the main cooling components in a still robust report.

FOMC member Williams said good progress has been made on the inflation and job goals and hence reducing the pace of bond buying may “soon” be warranted. But the conditions to support rate hikes still lie well in the future, with long-term inflation expectations remaining relatively stable. Brainard said she expects the conditions on the labour market to be met soon, allowing bond purchases to be tapered, but added that there’s no signal from that for the timeline for rate hikes. Evans shifted to a more hawkish tone regarding tapering: “If the flow of employment improvements continues, it seems likely that those conditions will be met soon and tapering can commence”, but regarding rate hikes: “Future decisions regarding the path of short-term policy rates seem much less clear to me at the moment”, advocating a sustainable moderate overshoot in inflation.

Bank of England Governor Bailey repeated comments from the recent meeting minutes to clarify that unwinding stimulus should come from an increase in the Bank Rate that could occur even before the end of their APP (to cease at end 2021).

Event Outlook

Australia: Westpac anticipates a 1.5% decline (market at -2.5%) in August retail sales given restrictions intensified across the major states over the period. However, basic food spend, ~40% of retail consumption, likely outperformed over the month, partially offsetting declines in covid-affected categories. The Q3 AusChamber-Westpac survey will provide a timely update on Australia’s manufacturing sector; particularly significant for this edition will be the impact of current restrictions on hiring and investment.

New Zealand: The employment indicator for August should show limited impact from the latest Covid lockdown.

UK: September nationwide house prices may lose momentum on stretched affordability and the tax break expiry (market f/c: 0.6%).

US: Wholesale inventories are due for a rebuild, however supply constraints are a headwind (market f/c: 0.8%). The July S&P/CS home price index is expected to see a further acceleration in annual price growth to around 20.0%yr. Delta’s resurgence stands as a headwind for September consumer confidence index (market f/c: 115.0). Chair Powell and Secretary Yellen will appear before the Senate Banking Committee. The FOMC’s Bullard and Bostic will also speak.

We are now in a full-blown global energy panic. It is not overly beneficial for the Australian dollar given it is bullish at the margin for DXY, especially since the US already has the highest inflation rate and a tapering Fed that will get more hawkish.

If we roll on much longer here, and/or get a bad northern winter, the global economy is on the verge of a major energy crisis until demand destruction is enough to crash prices.

Given China is already shutting down which will take down European industry quickly, and the US is slowing, that will not take very long.

2008 might be the right comparison. Not 2015.

Houses and Holes
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  1. Not just you, I’m saying all analysts or economists can’t continue to say inflation is transitory
    There has not been a commodity crash
    Iron ore yes has halved from the high

    From pre pandemic levels
    Copper still 50 plus % higher & hasn’t fallen
    Oil (energy) still pushing higher at post pandemic highs
    Lumber 30% up from lows last month & more than 50% up from pre pandemic levels
    Fright costs 300 plus % higher
    Food prices way higher

    Look at the CRB index, no commodity crash & its 30% higher than pre pandemic levels

    Inflation expectations are still at post pandemic highs

    There is no argument now that inflation isn’t persistent & problematic.

    Just look at the US 5 & 10 year yield @ 1% & 1.5%
    The 5 year yield at 1% is higher than pre pandemic levels

    Analysts arguments of transitory are not valid anymore

    And what surprises me …….
    I spoke with a few friends yesterday & I said can I ask is anyone out there anywhere aware that interest rates/home loan rates are about to start rising, they said absolutely no one

    I can’t believe no one is talking about interest rates rising, I’m not even being a smart arxe, it’s happening right in front of us now &.no one is even talking about it

    Does anyone have their eyes open ?

      • OIl embargo lasted a few months – impacts were felt for over a decade.

        The problem with a price spike via a transitory event is the feedback into the supply chain takes years to work through.

    • It’s win win either way, rates rise housing market tanks, or stocks crash, both events are exciting to watch

    • Juliette DeClercq makes the excellent point on MacroVoices that inflation isn’t an issue until second order effects kick in – that’s wage rises which then cause a wage price spiral. Right now, yes prices are up, but unless wages rise it’s transitory.

      • russbw the idioticMEMBER

        she makes some very good points on how she thinks wage rises are coming and I can’t disagree with what she says. It’s whether the wage rises will be transitory I feel. The timing of her cyclical call is where I think it would very hard to judge, however, global steepening YC she says. Will be an amazing call if she’s right I think.

    • Jumping jack flash

      “There is no argument now that inflation isn’t persistent & problematic.”

      Inflation is not problematic it is essential. Their “transitory” word that they like is just placating semantics.

      How can businesses hope to pay workers more when they’re all vying for the same amount of consumption dollars in the economy?
      How can businesses pay workers more when they’re focused on paying them as little as possible to maximise their own incomes (to use to obtain more debt with)?
      How can workers buy more, and more expensive retail goods and services with their wages converted into debt (to be recycled as other people’s wages), when their wages are stagnant at best and falling at worst and debt eligibility criteria can’t go much lower than it is?

      Debt isn’t growing nearly fast enough to counter the drain from its own interest. Close to 100 billion dollars is wiped from potential consumption dollars every year and handed to the banks to recycle as more debt (that requires more interest!). Ideally that interest is made up by even more debt magicked into existence, but debt isn’t growing fast enough to keep up and also provide enough consumption dollars.

      Debt growth for the past decade has been borderline at best, but most of it is locked away in housing and doesn’t get used for consumption all that much.

      The answer to the current debt problem is inflation, and LOTS of it, and the solution to the problem of inflated prices that nobody can afford is government stimulus and LOTS of it to be used directly for consumption while wages catch up, and they will. Then we reach that permanently high plateau for wages, and then we can all take on more debt to power the economy to the next leg up.

      This is the New Economy.

  2. Bcnich, its because it has been so long since the ‘market’ has been allowed to function, everyone think CBs will take care of it.
    For many people its the only way they’ve known in their adult life. And I fear they’ll see it again.

    • Carlos
      I’m not forecasting anything I’m just stating facts above.
      It’s just one excuse after the other, that’s just made up

  3. Copper was 4.10 last Monday & 4.27 last night, copper isn’t soft
    US 10 year is up 20 bp in 2 days, of course the increase has slowed after a rise like that

    This is fake news

    Ok anyone can have a view on the AUD but all the data at hand is pointing to the AUD has found a bottom
    Commodity prices (CRB) at highs
    Market positioning & sentiment so negative etc

    But a narrative just keeps getting made up to suit you

    What’s ahead is now becoming very clear

    • Offical warning. Accuse me of fake news again and you’re banned. Copper was soft. And it’s chart is clearly trending down.

      Doesn’t mean it can’t take off again but stop the hysteria.

      • I said nothing wrong
        I wasn’t rude, nothing I say is even close to the way you have spoken to me over the years
        Im just stating facts
        Ban me I don’t care, but out of professionalism refund the money pro rata of my membership & I’m happy to leave

        I’d like to leave, will you repay me the 6 months of my membership please ? and I’ll be gone

          • I’m not even giving a view or disagreeing with your view today
            I’m just stating facts today

            Honestly I don’t care, I’m interested to read the articles you post, the Wall Street etc views

            It’s probably time for me to move on anyway but I’m interested to having access to all the information

        • bc, I think Dave doesn’t professionally have a problem with anything you’re saying, except the loose ‘fake news’ comment, as it’s inadvertently an affront to his professionalism, which stings – else, hang around, as we value you here.

          Trust me, I think most here, myself included, actually like the variety of ideas that get thrown around here – despite what some say here, I don’t think most people here actually want a homogeneous set of ideas (and I don’t think we do have homogeneity).

          Some may disagree with you strongly, but please don’t think we don’t generally want you around, when the opposite is actually true.


          • I apologise for the fake news comment.

            Really fake news is just something trump made up that’s probably true but he disagreed

            It really wasn’t intended to be personal or antagonistic

            Just blowing steam which I rarely do, I don’t think I’ve had an official warning, maybe 1 a few years back.

          • The Travelling Phantom

            @bcnich good on you mate for this nice comment.
            This website without you and Reusa is tasteless

        • @bcnich, appreciate both David’s and your opposing views. We need it here. Keep it professional and we are all good. Cheers.

    • bcnich – I applaud your enthusiasm and commitment. I do ask that you keep your positions well managed so you survive if the market turns against you – as it can for all of us. The most dangerous thing in trading is to be certain. There are a couple of interesting aspects here. Commodities are unlike other speculative assets – they are anchored to real underlying demand.

      The position today is that underlying demand is facing a surprise drop from China tightening. Even Copper demand is facing an overall drop. What could go wrong with that thesis and support your position – a sudden capitulation by Chinese authorities rejuvenating the building boom.

      What does fall into your thesis, and you don’t mention it, is the Thermal Coal demand. It seems like cutting off Australian coal to keep their face, has led to a prolonged undersupply. There is a short term spike in demand, caused by weather and seasonal factors, but there may be a higher underlying demand than we’ve seen. Moves away from reliance on Coal take time so while it’s not a great long term investment it could easily perform well in the medium term.

      The AUD space is somewhere I am not playing. The market is heavily short, as you know. That means there is plenty of room for big players to do a pump and dump, cleaning up as short covering is forced on participants. It’s happened twice in the last couple of weeks. A bottom isn’t in until it’s in. Until then it’s a resistance level. A dangerous resistance level. A bottom needs confirmation, and it’s too soon to get excited here, I feel, until that happens. Look for an emerging demand shock (not visible yet).

  4. “Cola adds to Australian income but oil and gas do not.” – I can’t remember the term for a serendipitous misspelling, but it makes me think of a bubble economy. Please don’t correct it – it’s perfect.

  5. I always look out with interest for Bcnich’s opinions. So just ban yourself foe a day or two and then come back please.