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The CEO of Compete Intelligence, Tony Nash, was interviewed on BFM to discuss the current state of the US markets.
The S&P fell 1.6%, the worst decline in a month, and the tech-heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Nash suggests that this may be due to bad economic data, specifically PPI and retail sales falling, but also notes that consumer is still strong. Nash explains that the US economy is built on services, so people may be trying to confirm their downward bias in things, and when bad news is reported, a sell-off day occurs. Nash also mentions that if PPI falls, that should mean inflation is slowing, which should mean the Fed would ease a little and slow down on rate rises.
He also mentions that markets may be spooked by all the announcements regarding job cuts, such as Microsoft announcing they plan to cut 10,000 jobs and Bank of America telling their executives to pause hiring. Nash suggests that these job cuts are small in terms of the gap that we see in the US workforce, which is still missing millions of jobs in terms of the openings versus the available people.
Nash also mentions the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. He suggests that the BOJ is managing the yield curve to suppress borrowing costs and wants to keep it below 0.5%. Nash also mentions that Japan’s central bank is getting pressure from other central banks to keep their rates low, this means that if Japan lets their rates rise, then that would have a knock-on effect around the world and cause a repricing of government debt all around the world.
Nash concludes by saying that he expects a weaker yen, but doesn’t think we would necessarily hit those lows.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station. BFM 89.9. It’s 7:06, Thursday, the 19 January, and you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. And earlier on, we did ask our listeners how traffic is like and Roberto said traffic today really smooth and super low compared to just yesterday. He loves Chinese New Year in KL. And so do we. I just love Chinese New York because I like the feasting and I like the ang bao collecting.
BFM
I get the hint.
BFM
Yes, we’re all looking at you, Tjen San. But in 30 minutes, we will be speaking to Angela Hahn of Bloomberg Intelligence on the impact of China’s reopening to Markhouse gaming and hospitality sector. But in the meantime, let’s recap how global markets closed yesterday.
BFM
After a good run, all key US. Markets ended down yesterday. The Dow was down 1.8%, S&P 500 down 1.6%. The Nasdaq was down 1.2%. In terms of Asian markets, the Nikkei was up by 2.5%, Hang Seng up by 0.5%. The Shanghai Composite Index, it was unchanged, the Straits Times Index, it was up by 0.3%, and the FBMKLCI it was down by 0.3%.
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BFM
Why are we always again and again there’s a trend here for sure. But to tell us where international markets are heading, we have on the line with us Tony Nash, CEO of Compete Intelligence. Good morning, Tony. Help us understand what’s happening in US markets. Because the S&P fell 1.6% is the worst decline in a month. Tech heavy Nasdaq snapped a seven-day rally, reversing gains of more than 1%. Is this just really due to bad economic data?
Tony
Yeah, we saw PPI and retail sales fall today. The weird part is consumer is still strong. The US economy is really built on services, so I think people are trying to confirm their downward bias in things. And whenever we see bad news, we see a sell off day. So I’m not necessarily sure I would read that much into it, aside from just there was really nothing else going on. So people saw some bad PPI news and they were negative. So if we see downward PPI, that should mean inflation is slowing, which should mean the Fed would ease a little. Not ease, but would slow down on rate rises a bit. So that should have been positive news for markets. So it’s just kind of a weird read of some of that data.
BFM
Do you think markets are also spooked by all these announcements with regards to job cuts? Because Microsoft says they plan to cut 10,000 jobs. Amazon of course, made announcements last week, and even Bank of America is it telling their executives to pause hiring. Not great for the mood on Wall Street?
Tony
Well, maybe, but I think those job cuts are actually kind of small in terms of the gap that we see. So the US is still missing millions of jobs in terms of the openings versus the available people so I think there’s something like 7 million jobs open. We also had a million people post COVID not come back to work. So we have a gap in the workforce, just a status quo workforce of a million people, but we have something like 7 million open positions. So when Microsoft lays off 10,000 people or Goldman lays off 4000 people, sure, it’s tragic. It’s definitely tragic for those individuals. But in terms of the overall health of the economy, it really doesn’t make that much of a difference.
BFM
And Tony, the yen tumbled yesterday after the BOJ went against market expectations by keeping its yield curve tolerance ban unchanged. What possible reasons would the central bank have for keeping this status quo?
Tony
Yes, so the BOJ is managing the yield curve to suppress borrowing costs and they want to keep it below kind of 0.5%. There have been some hedge funds and some big investors who’ve been betting that they would tighten it. And the BOJ is just bigger. I mean, when they came back and they said, we’re going to hold the line at 0.5, they spent about $100 billion so far this month to defend that and they have plenty of resources to hold that. So the release issue is this is if Japan lets their interest rates rise, then Japanese, say, banks and pension funds and other investors would consider selling debt from other parts in the world and buying Japanese debt. Okay, so if Japan lets their rates rise, then that would have a knock on effect around the world and that would cause a repricing of government debt all around the world. So it’s not just the BOJ wanting to keep this for Japanese domestic reasons. They’re getting pressure from other central banks to keep their rates low.
BFM
Okay, Tony, but what does this then all mean for the yen? I mean, at its worst point, the yen was trading 150 against the US dollar. Today it’s 128. That’s a very wide range in just a few months. So what are your expectations?
Tony
It is yeah, certainly I would look for a weaker yen. I don’t know that we would necessarily hit those lows. But the BOJ has made their stance clear. The BOJ has a new head coming in in a few months. I would say they’re unlikely to dramatically change policy with a new head because they don’t want to make people nervous. So I think they’re going to aggressively defend the status quo. So I don’t necessarily think you see a yen appreciating dramatically from here. I think the bias is really toward the downside.
BFM
Okay, staying on the topic of currencies then, what’s your view on US dollar? We’re just looking at the Bloomberg Dollar Spot Index this morning. It’s already down 1.5% on a year to date basis. The era of King dollar, is it over?
Tony
Well, I think not necessarily. If you’re looking at the DXY, it’s really heavy on the euro. And so we’ve seen Europe do better than many people thought through the winter because we haven’t had a cold winter there and energy prices haven’t bitten as hard as many people thought they would. So I think Europe is doing better and the Euro is doing better than many people thought. And everything in Currencies is relative. China is opening, although it’s gradually. China is opening. And so that’s good for CNY. Again, in a relative basis, I think there is downward pressure on the dollar, but I don’t necessarily think we’re over on that. I don’t think we’re heading straight down to, say, 95. I think we’re going to see some back and forth over the next couple of months as we figure out what the forward trajectory of the dollar is. And a lot of that really has to do with what direction will the Fed take in terms of their rate hikes and their quantitative tightening. And it has to do with treasury activity from the US. Treasury. How will they spend, what will they do, how will they fund the US government?
BFM
Tony, some analysts are saying that without a recovery in the Chinese economy, a global recession is all but assured. But what are your thoughts on this?
Tony
I don’t necessarily think that’s the case. I think China will do okay this year, and I think regardless, Europe will likely dip into recession this year, although fairly moderate. In the US, you see a very strong employment environment. And so employment is one of the key considerations for recession. So I don’t believe the US. Will dip into recession really on the back of employment news more than anything else. And so once we see some of these layoffs with larger companies and we get through this as, say, equity valuations stabilize, I think we’ll start to see a renormalization in the US economy as the Fed kind of takes the foot off the brake of the US economy. Of course, the Fed will continue to raise rates, but they’ll do it at a much slower pace, and that will make people much more comfortable in doing things like investing capital and so on and so forth, that will help the US to grow.
BFM
All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, giving us his outlook for the world economies and also markets in the coming weeks. I think very much the question everyone has on their mind is Fed rates. What is the terminal rate? Will they basically raise rates too much and then cause the US. Tip into a recession? But I see increasingly our guests, our commentators sounding a little bit less pessimistic, hinting that perhaps we’re going to have a soft landing rather than a hard landing.
BFM
Yeah, I think it’s really on the back of the really still strong employment in the US. I mean, he did mention there’s still 7 million jobs available in the US. And there are one million people post COVID that didn’t come back to work. And I think that really is his key point, that the US may not slip into recession, but it looks like EU will and China, it looks like they are really on track to a better recovery this year. I’ve seen some economists say that GDP growth could be like five to 6% as well.
BFM
I see that consensus figure that range is around there for China’s GDP for 2023. Now, turning our attention to corporate that released results they reported, which is Alcoa excuse me, which is aluminium company. They reported fourth quarter results earlier today, which saw losses narrow to $374,000,000. Loss per share as a result was $2.12. The loss included a 270 million charge related to tax expense. Revenue did decline 20% to $2.66 billion.
BFM
And Alcoa attributed the decline in revenue to lower prices for both Alumina and aluminium. Additionally, Alcoa will see some executive leadership changes effective February 1, including CFO William Oplinger reassignment to chief operations officer, in addition to his executive vice president role.
BFM
Okay, the street doesn’t really like this stock when you look at Bloomberg. Five buys, only seven holes, no sells. Consensus target price for the stock, $52.18. During regular market hours, the stock was already down one dollars. And now I think we need to talk about one of the world’s biggest companies, Apple. They are expanding their smart home lineup, taking on Amazon and Google. Are you surprised by this move?
BFM
Jensen not surprised at all. I think Apple is really the leader in terms of innovation, and we’ve seen it over the years, so no surprises there. So I think they’re launching some new devices. There’s a smart display tablet, there’s a HomePod. There’s a TV box and a MacBook and Mac mini using their cutting edge new processor, which is the M Two chip.
BFM
Are you going to buy any of these gadgets? You don’t even use an Apple phone. You haven’t joined a cult. You’re about the only one on the morning run. You and Philip sees that hanging on.
BFM
The iPad at home, but they’re quite old.
BFM
Okay, but will this make a dent to Apple’s earnings? Perhaps. I think they are trying to diversify their product range, because the iPhone, I think, hasn’t done as well as expected. If you look at Apple or Cost, still a darling on Wall Street. 36 buys, eight holes, two sells. Consensus target price for this to $169.24. At regular market hours, it was down seventy three cents to one hundred and thirty five dollars and twenty one cents. I, for one, will be curious as to what these products will be or how they’ll fare. Up next, of course, we’ll cover the top stories in the newspapers and portal. Stay tuned for that. BFM 89.9 you have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.
This video interview is owned by Channel News Asia, and the original source can be found at https://youtu.be/U_Im05ClsN0
The United States Federal Reserve’s plan to ease its pace of interest rate hikes as soon as December would bring some relief for markets concerned about the central bank overtightening too quickly, Mr. Tony Nash, founder and chief executive of data analytics firm Complete Intelligence, told CNA’s Asia First.
Transcript
CNA: Federal Reserve chair Jerome Powell has signaled policymakers could slow interest rate increases starting this month. That sets the stage for a possible to downshift to a 50bps rate hike when Fed officials gather again in two weeks.
Powell: Monetary policy affects the economy and inflation with uncertain lags. And the full effects of our rapid tightening so far are yet to be felt.
Thus it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.
CNA: But it isn’t quite a dovish turn. The U.S Central Bank Chief also stressed that they have a long way to go in restoring price stability despite some promising developments.
Mr. Powell warns against reading too much into one month of inflation data saying that the FED has yet to see clear progress on that front. In order to gain control of inflation, the Fed chair says the American labor market also has to loosen up to reduce upward pressure on wages. Job gains in the country remain high at nearly 300,000 positions per month and borrowing costs are likely to remain restrictive for some time to tamp down rapid price surges.
This is where U.S interest rates stand after an unprecedented series of four 75 bps rate hikes. Policymakers projected earlier that this could go as high as 4.6 percent but Powell says they will likely need to keep lifting rates more and go beyond that level until the inflation fight is done.
The less hawkish tone from Powell Boyd U.S market stow and the S&P500 erased losses it searched three percent. The Dow gained two percent while the NASDAQ jumped more than 4.4 percent. the 10-year treasury yield also dipped as Bond Traders dialed back their expectations on how high the Fed may push interest rates while the U.S dollar retreated.
Tony Nash is founder and CEO of Complete Intelligence joining us from Houston, Texas for some analysis. Now Tony, just looking at Powell’s comments, the first differs in some way with what the Fed and its officials have been telling us earlier in the year and how we’ll get there fast to try to reach the terminal rate. But now it’s signaling that it will get there slower. What is this going to mean for businesses and consumers in the US?
Tony: I think what it means is we’re going to get to the same destination. It’s just going to take a little bit more time to get there. So the Fed has seen jobs turn around they’ve seen jobs aren’t necessarily slowing but the rate of rise in open jobs is slowing. We’ve seen mortgage rates go up. We’ve seen the rate of inflation rise slowly.
So the Fed is seeing some things that they want and they’re worried about over-tightening too quickly. Because what we’ve seen so far is really just interest rate rises. They really haven’t even started quantitative tightening yet. I mean they’ve done a little bit maybe a couple hundred billion dollars. But they have nine trillion dollars on their books give or take.
They haven’t even started QT yet. And they’re starting to see inflation and some of these pressures on markets at least slowed down a little bit. So I think they’re saying “hey guys we’re still going to get to a terminal rate of five percent or five and a half percent but we’re going gonna slow it down from here unless we see things accelerate again.”
CNA: When do you think we will actually see that five to five and a half percent?
Tony: You’ll see it in the first quarter. You know if we do say 50bps in December and maybe another 50 in January, we’ll see some 25bps hikes after that but I think what markets the cyber leaf that markets are giving right now is just saying. Okay, we’re not at 100 or 75 in December.
I think that’s a big size that you saw today and you know. It raising at 75bps per meeting just put some real planning challenges in front of operators people, who run companies. So if they slow down that pace and people know we’re still going to get to that 5 to 5.5%, it allows people to plan a little bit more thoughtfully, and a little bit more intelligently.
I think this does relieve some people of the worries of the Fed over-tightening too quickly and it also relieves worries that the Fed is only relying on monetary policy. They’re not relying on interest rates I’m sorry and they’re not relying on quantitative tightening. so the Federal balanced approach sometime in Q1.
CNA: Okay, you also mentioned before in our past conversations, the concern that the market has been having for this week especially since it’s China’s lockdowns and you see these restrictions ending gradually. What is that going to mean for Energy prices and inflation?
We see Energy prices say now they’re what high 70s low 80s somewhere in that range. We do see a rise of say crude oil prices by about 30 percent once China fully opens. We could easily be 110-120 a barrel once China fully opens. And so there will be pressure on global energy markets once China opens. Other commodity prices will see the same because we’re just not seeing the level of consumption in China that we expect.
What we also expect is for Equity markets to turn away from the U.S. and more toward Asia. So the US has attracted a lot of investment over the past year partly because of the strong dollar partly because of kind of a risk-off mentality consolidating in U.S markets. As China opens and there becomes more activity in Asia than we would expect, some of that money to draw down out of the US and go back to Asia.
CNA: Can you look at the jobs market in the US even as we expect this potential pivot towards Asia for stock market investors? The jobs market and the picture on wages there because the ADP data shows that there seems to be a cooling in demand for labor how soon do you think we can see a broadening out to the broader jobs market?
Tony: You would have broader cooling of demand in the jobs market I think, that’s definitely hidden tech. You’ve seen a lot of layoffs in technology over the past say three weeks. And that will cascade out. I don’t necessarily see think that you’ll see that in places like energy, but you will see that in maybe finance, some aspects of financial services. You’ve seen some of that and say mortgage brokers and this sort of thing so you’ll see that in some aspects of financial services. Some aspects of say manufacturing at the edges. but I do think there’s a lot of growth in U.S manufacturing as this reassuring narrative really takes uh gets momentum in North America. And so even though we may shed some manufacturing jobs in one area I think we’ll see growth in manufacturing jobs in other areas.
CNA: Okay, Tony. We’ll leave it there for today. Thanks for sharing your analysis with us. Tony Nash is founder and CEO of Complete Intelligence.
The released Fed minutes show that most officials are backing a slower pace of interest rate hikes. Markets reacted positively but this is false optimism as the terminal Fed Funds Rate may eventually be higher. The 3Q reporting in the US is also coming to a close and 75% of corporates experienced downgrade in earnings. Have the cut in earnings by analysts been adequate or will there be further downside, with 2023 outlook still uncertain? For answers, we speak to Tony Nash, CEO, Complete Intelligence.
Transcript
BFM
BFM 89 Nine. Good morning. You’re listening to the Morning Run at Thursday. It’s Thursday, the 24 November November Friday, junior, as we like to call it. Here. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. As always, let’s kickstart the morning with a look at how global markets closed overnight.
All key US markets showed gains as most members of the Fed said the pace of rate hikes will slow down. So the Dow was up 0.3%. The S&P500 was up 0.6%, and Nasdaq was up 1%. In Asian markets, the Nikkei and Hang Seng was up by 0.6%. The China Composite was up by 0.3%. The Straits Times Index was down by 0.1%, and our very own FBMKLCI was up by 0.2%.
Joining us on the line now for more on what’s moving markets, we speak to Tony Nash, CEO of Complete Intelligence. Hi, Tony. Good morning. Now, let’s start with just some reactions on the Fed minutes that were released. It showed that most officials are backing a slower pace of interest rate hikes, but that the terminal rate might need to be higher. What do you think? Are we seeing a relief rally? And is that sustainable in the short term?
Tony
Yeah, I think the ultimate destination is probably the same, but the pace of getting there is slower than many people thought a couple of weeks ago. So I think what it means is we’ll see more, say, 50 and 25 basis point hikes. That’s the expectation. It’s still possible we’ll see a 75 if Powell really pushes hard for December, but we’re still going to see a 5, 5.5 terminal rate, depending on really how things end up for CPI and PPI next month. But it’s just the pace and markets are more comfortable with a gradual adjustment to higher rates than the continued kind of shock treatment.
BFM
And Tony, the US reporting period is coming to a close. How would you assess the quality of corporate earnings release so far? How well have they tracked market expectations?
Tony
They’re OK, they’re pretty weak, actually. Compared to 2021, we had, I think, 25% earnings growth in ’21 about this time last year. They’re just over 3%. So it’s not even near where it was last year.
Something like 75% of companies are seeing estimates for their downgrade. So people expecting inflation to endure longer than they thought. If you remember a year ago, people were saying inflation was transitory, so they’re saying inflation will endure longer and rate hikes will continue.
So with credit tighter, businesses and consumers are not expected to spend as much.
So going forward, there is a fear that wallets will be more closed than they are now and earnings will continue to be tight.
BFM
Which just confuses me, Tony, because if the Fed stops their rate hikes at least decelerates the pace of it. And at the same time, corporate earnings aren’t going to be as robust as ever. Then why is the S&P500 above 4000 and the Dow Jones at 34,194 points? I mean, they’re just in fact, the Dow is only down 6% on a year to date basis and the S&P down 15%. Shouldn’t markets be actually more bearish than they are now?
Tony
Well, I think there are a couple of things happening there. I think first, there really is consumers have continued to spend and businesses have continued to spend in the US. Although we’ve seen economic growth slow dramatically, we’ve had spending continue to push forward. So if the Fed slows its tightening cycle, and keep in mind, they haven’t really started quantitative tightening, meaning getting things out of their balance sheet. They’re only, I think, $200 billion off of their high.
But if the Fed continues to tighten at an accelerated pace, then markets are worried. But again, if they slow it down, the feeling is that spending will move in stride. It won’t necessarily be too shaken up.
Also, on inflation, don’t forget inflation didn’t really start on an accelerated basis until November of ’21. So we had inflation, but fairly muted inflation then. And so what we get after November, well after this month, is what’s called a base effect.
So we’ll likely continue to see inflation rise, but not necessarily at the pace that it’s been over the past, say six to nine months. So does that mean inflation is peak? No, not at all. But it means the pace of the rise of inflation is likely going to slow on base effects.
So if that happens, we’ll have a lot of people declare victory over inflation, but I think that there is an expectation that that rate will slow as well.
BFM
Can you look at the prospects of retailers like Best Buy? We see Abercrombie and Fitch. These names are defying inflationary trends and higher rates to post better results than expected. So why has this sector been the exception to the norm?
Tony
Yes, the quick answer is most of those guys have been pushing price. So they’ve been passing along their higher labor and goods costs onto consumers.
Now they’ve been pushing price while sacrificing volume. So they’ve been pushing 8 to 10 to 15% price hikes in many cases. But they’ve had fewer transactions between one and say 6% fewer transactions.
Regardless, they’re earnings have risen. So they’re not as worried about fewer transactions. They’re focused on keeping their margins up.
And so when you look at retailers like Walmart, which has mixed, say, general goods and food, they’ve done very well. They had a very difficult Q2, but they did very well this past quarter.
Home Depot, which is a DIY store, has done very well because they pushed price Cracker Barrel has done very well.
Cracker Barrel. These are not these are not retailers that are at the high end of the market either. These are mid and even, say lower end companies, but they’re pushing price on the middle and lower end of the market.
Higher end of the market? They’re doing great. So it’s tough to be a consumer in this market because price definitely continues to be pushed and we expect price to continue to be pushed through probably Q2 of next year.
BFM
And Tony, with potentially slower pace of interest rate hikes, how do you expect the technology sector to do? Is there more pain to come for the likes of Amazon and Meta?
Tony
For sure. Amazon, Meta and technology companies generally do very well in very low interest rate environment, where the money is effectively free or negative real interest rates.
As you have to pay for that money, it becomes tougher for those companies to do well because their core investment is in technology. And we had things like Mark Zuckerberg at Meta really went off the rails with some of his spending and investment.
It’s not to say that the Metaverse investment is not ever going to happen, but much of that stuff really went way overboard. Same thing with, say, Amazon with some of their infrastructure investments and delivery investments.
So we do expect HP today, I think announce 6,000 jobs to be lost over the next, I don’t know, twelve months or something. So we do expect much more pain in tech. We expect that to continue until at least the end of Q1, if not a little bit further.
BFM
And Tony, let’s talk about oil because WTI for futures delivery in January, $77 a barrel. And we know that there’s an upcoming OPEC meeting in December. What are your expectations in terms of oil price then?
Tony
Yeah, it’s tricky, right? Because oil prices are kind of in that zone where a lot of people are comfortable. And so the question is, is this acceptable to OPEC members? So Saudi Arabia, UAE, Iraq and Kuwait have already come out and said they’re going to stick to the current plan, the current cuts that were already announced last month.
But we have things like the Russian price caps coming into play. And you know, our view is the price caps are pretty meaningless actually, because Europeans are pretty good at circumventing the kind of emotional embargoes they put in place.
I’m sorry to put it that way, but they put these laws in place and then they circumvent them pretty well. A lot of this is theater. So that’s not the price caps are not going to have as much of an impact as many people thought. So it’s possible if we get into next week and crude prices start coming back pretty strongly, or sorry, if we get into next week and crude prices are as weak as they are now, we may see a 500,000 barrel per day cut. I think that’s a possibility, but it’s likely they’ll stay on what’s already been announced.
BFM
Tony, thanks very much for speaking with us. And since it’s Thanksgiving eve. Happy Thanksgiving to you. That was Tony Nash, CEO of Complete Intelligence, giving us his take on the trends that he sees moving markets in the days and weeks ahead.
All eyes, of course, on that all-important inflation number and how that will affect how the Fed raises hikes moving forward.
I think the key takeaway for me was he mentioned that 75% of corporates in the US had downgrades, which I feel it’s a good thing as it brings expectations lower and more in line with future expectations and it also gives perhaps some room to surprise on the upside.
Yeah, well, markets seem to be at crossroads, but a little bit cheered by the fact that the Fed isn’t going to raise rates as aggressively as they have in the past. But I want to keep my eye on corporate earnings. I think that if you see continuous downgrades by the analyst community, you see the messaging coming out of US corporates that things aren’t looking as rosy as they are, then it’s just going to be hard for the Dow, S&P500 to actually break through their current resistance levels. So I think it’s something we have to keep an eye on.
Investors were not impressed by results from Meta and Alphabet leading to a sell-off in tech stocks on Wall Street. We speak to Tony Nash, CEO of Complete Intelligence, to find out how results from Apple and Amazon set to come out soon might impact overall market sentiment.
Transcript
BFM
This is a podcast from BFM 89.9, The Business Station.
BFM
BFM 89 Nine. Good morning. You’re listening to the Morning Run. I’m Shazana Mokhtar with Keith Kam. It’s 7:06am on Thursday, the 27 October a rather overcast Thursday morning. For now, perhaps we’ll see the sun come out a little bit later. As always, we’re kickstarting the morning with a look at how global markets closed overnight.
BFM
It was a bit of a mixed day for what generally red though the Dow Jones on Wall Street, the Dow Jones ended marginally higher, that’s 0.01% barely changed. S&P 500 was down 0.7%. But the action was on the Nasdaq that closed 2% lower because of disappointing results from Meta and Alphabet. We’ve just got to wait for the Apple and Amazon results that will be out tonight US time. So we’ll be discussing that tomorrow. Early in the day, Asian markets were generally green. The Nikkei was up 0.7%, the Hang Seng was up 1%. The Shanghai Composite and Singapore’s STI, they were both 0.8% higher. And back home the FBM KLCI closed 0.7% up.
BFM
For some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony, thanks for joining us today. Now, notwithstanding overnight results, global equities led by US stocks have extended gains over the last week, avoid by the expectations that peak inflation has been reached. What do you think? Are they being too sanguine about inflationary pressures?
TN
I don’t necessarily think they’re being too sanguine. There are cases to be made that housing prices and wage growth have turned the corner. Goods price inflation has likely peaked, but there doesn’t necessarily mean that we’ll see prices decline. Regardless of what’s happening in the inflation environment. The Fed is going to raise rates in November, likely by 75 basis points and again in December. So the Fed typically lags inflation on both sides on the way up and on the way down and so they’re likely going to over tighten. Markets have largely factored in a 75 and 50 basis point hike over the next two months. So are they sanguine? I don’t know. I think if we start to see inflation really take a downward turn, then it could be a very good thing for all of us.
BFM
But Tony, the 75 basis point expected hike by the Feds comes at a time when a lot of analysts are also expecting recession to hit the US sometime sometime next year. Would there be some reassessment as we go along?
TN
Well, we’ve already had kind of negative economic growth for half a year, so we do need to see jobs come down. And with the tech earnings coming out, as you guys mentioned in the news segment, we expect tech companies to announce some pretty major layoffs before the end of the year.
BFM
Let’s get into that a little bit, Tony, in terms of tech results, I mean we did see Meta overnight, we’ve seen how Microsoft also came in below market expectations. What do you think this tells us about the direction of the tech sector moving forward, especially with this environment of rising interest rates and a looming global recession?
TN
Yeah, well, tech companies have overhired. They were hiring based on valuation, not necessarily based on revenue. And so now that their valuations have come down, they have excess staff and they need to clear the decks. And the productivity within the technology sector, although it sounds a little weird, the productivity is pretty low because they’ve had too many people. So as these companies come out and give pretty sad earnings reports, there’s going to be pushback from investors that they need to lay people off, and that will come out in the next couple of months. So we’ll see some of that. Now, if you compare that to, say, companies like Coca Cola and GM who beat the street, those companies have been able to pass on cost rises to their customers, so they’ve factored in cost rises to their price. Now, many of those companies saw volumes decline, but price rises more than made up for the volume decline. So they’ve beat expectations by raising price, in many cases by double digits.
BFM
Tony, we’re expecting Amazon and Apple results to come out tonight, and what we’ve seen from the previous results have sort of, well, dampened market sentiment, if you may, what are your expectations going forward?
TN
Yeah, I don’t think they’re going to be stellar results. I think Amazon had this, at least in the states, they had this kind of second prime day a couple of days ago to goose sales revenues for the quarter, which tells me that things are not stellar at Amazon, and so there are signs that things aren’t working out. The new iPhone is kind of a yarn for a lot of people, so it’s not necessarily pushing out. And so I think the expectations are for pretty mediocre results. So if they report in excess of expectations, then tomorrow will be a fantastic day in markets. But I don’t think that’s necessarily likely at this point.
BFM
All right, something we’re going to be keeping an eye on. Another thing to keep an eye on is the slew of indicators that are going to be coming out. We’ve got US GDP, durable goods, and initial jobless claims numbers. Which indicator are you paying the most attention to in terms of being a gauge of how well the economy is going?
TN
Yeah, one of the things that I always tell people to be careful of with some of these macroeconomic numbers is things like GDP. What’s being announced is what’s called a preliminary release. So they kind of have a sketch of what’s happening in the economy, but it’s not detailed. So when these GDP announcements come out and it’s the first release, it’s not really accurate. And those things can change by 50% or more in some cases. So GDP is not really something I look to. It’s kind of a headline, but it doesn’t really mean a whole lot.
TN
Durable goods is interesting because that tells me that people are investing in things, buying things that last a long time so that they can deliver new services or new products in, say, three to six months time. So that would tell me people are looking forward. So if durable goods is a bad number, then it tells me people are really just trying to take care of today and not investing in the future.
TN
Jobless claims. I don’t know. Sometimes it’s meaningful, sometimes it’s not. I think the sentiment around jobless claims is overhyped. The Fed is definitely watching jobless claims because they want to see wages and jobs come down. So with jobless claims, it’s one of those good news and bad news types of things. So we’re kind of hoping for a poor jobless claims so that the Fed can kind of tick off the box and say, mission accomplished.
BFM
Tony I just want to pick your brains on this. We’ve seen three straight days of market gains on Wall Street and this morning, or rather last night for you or today for you. We’ve just seen a reversal of that. Is this an indication that maybe fortunes might be changing going forward?
TN
I think it’s a good question, and I think it’s hope that the Fed is changing course. And I think regardless of what comes out, say, this month, and I think probably next month, I don’t think the Fed is going to change course. They were caught flat footed. They said that inflation was transitory, they messed up, they’re embarrassed, and they’re going to make people feel it. And people are going to lose jobs and homes and all sorts of things because regional Fed governors don’t want to be embarrassed again. So I think at least over the next two months, they’re probably not going to change course. They’re going to continue to tighten. I don’t think there’s been a dramatic change in everything. I think this is a little bit of hope, and I think it is some earnings that have been reported that are better than expected. But I think in general, people are being very cautious about trades they make.
BFM
Tony let’s end the conversation with a look at oil prices. They are taking a breather on news that US stock bells have risen. How will that translate in terms of energy prices as the Northern Hemisphere moves into winter?
TN
Yeah, the SPR, the Strategic Petroleum Reserve release, it’s put a lot of volume in the market in recent months. And of course, that’s lowered crude prices and it’s lowered the price of refined products. So after the election, and it’s no secret we expect the SPR releases to decline dramatically. And we’ve talked for a few months about how we expect crude prices to kind of spike towards the end of the year. And that would be spikes in crude prices and downstream products like, say, petrol. So we do expect that to happen in the North American market, kind of in Q4 and through Q1 out of the effects of that SPR release wear off.
BFM
And meanwhile, OPEC has also forecasted that China’s oil demand will decline by 60,000 barrels per day. Is that something that you see could cap further spikes in prices?
TN
It could. I mean, 60,000 barrels isn’t a lot, but it could. I think if China were simply to end COVID Zero, it would really drive consumption of crude. So OPEC must expect further dampening of the economy in China, and that’s no surprise. I mean, China is really having a hard time right now, and whether or not they can come back in ’23 is questionable, so it’s no surprise. But 60,000 barrels a day really isn’t a lot, and I don’t think it would affect prices dramatically.
BFM
Tony, thanks as always, for speaking with us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
Yeah, so we did see Meta shares plummet 17% on week fourth quarter forecast. And earning miss. It basically came up well short of Wall Street’s expectations. Earnings per shares earnings per share was $1.64 versus a $1.89, which was what was expected. Revenue was at $27.7 billion. Daily active users did meet expectations at 1.98 billion users, and the monthly active users came in at 2.96 billion versus 2.94 billion.
BFM
I mean, Meta is contending with a broad slowdown in online ad spending, challenges from Apple’s iOS privacy update and increased competition from other players like TikTok. It’s getting more expensive to run the company as Meta’s costs and expenses rose 19% year over year to $22.1 billion. And that’s something that Tony alluded to earlier, the fact that they’re likely going to see more layoffs moving forward. Tech companies have just been on a hiring spree that they cannot afford at this point. And I bet the WhatsApp outage the other day didn’t help a Meta’s fortunes either, at least in terms of its reputation and image. It could see a lot of people try to migrate elsewhere from using WhatsApp as their main communication source to another platform that is more stable, perhaps.
BFM
I must say we could wait until to see what happens towards the end of the year. Well, November actually, just next month when the midterm elections come, and we see if there’s any pick up in usage then.
BFM
That’s true. All right, it is 7:18 in the morning. We’re heading into some messages, and when we come back, we will be covering the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9. You’ve been listening to.
BFM
A podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VFM app.
All eyes will be on the US CPI data as it gives us an indication of the quantum and pace of rate hikes. But is the Federal Reserve too slow to see if inflation is coming down when there is anecdotal evidence of slowing car and home sales? Tony Nash, CEO of Complete Intelligence tells us.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station BFM 89 Nine. Good morning. You are listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Chong Tjen San. 07:00 a.m on Thursday the 13 October. Let’s kickstart the morning with a recap on how global markets closed yesterday.
BFM
Looking at US markets, all three key indices close in the red S&P 500, down zero 3%. The Dow and Nasdaq down zero 0.1%. And I think that the S&P has been down for six consecutive days already. Moving to Asian markets, and the Nikkei down marginally 0.02%. Hang Seng down 0.8%. The Shanghai Composite Index back the trend. It’s up 1.5%. Straights Times Index down 0.7%. And our very own FBM KLCI is down 0.5%.
BFM
So for some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks as always for joining us. Now, US CPI data is due out on Friday. What are your expectations for that figure? And how much of this do you think will determine the quantum of the next Fed rate hike?
TN
Everything rests on CPI right now. So I think if it comes in line or higher than expected, it’s just bad news for markets for the next few days. So people are hoping for a lower number because it would provide some relief and some proof that inflation has maybe peaked or is at least slowing down. I think it’s possible that we have it come in slightly under, but given the PPI reading that came today, it’s not a good a sign. So we may see CPI continue to rise in tomorrow’s trading day in the US.
BFM
Okay, Tony, we have a history of the Fed being late to the game, right, when it came to inflation. They kept saying “transitory, transitory,” and we know it wasn’t transitory at all. Do you think that they are also late to the game in recognizing that inflation has been brought under control? Because when I look at some of the data points, one of which is used car sales, that’s dropping. New car sales are also dropping. House sales, home sales are also dropping. Is it possible that inflation is being overstated?
TN
Well, you’re 100% right on the Fed being late to the game, both to recognize inflation and to impact it. The problem that we’re seeing with, say, used cars is, although the unit volume is slowing, the unit price is still rising for, say, used cars, for eating out, for these sorts of things. There’s still been upward pressure on these because of the factor input costs and supply chains and labor and others. So it does feel in the US like things have not that prices have gone back down, but that the rate of rise has slowed. That’s what it feels like at the consumer level, except for petrol, gasoline, which has started to rise again over the past week.
BFM
Let’s take a look over at the UK, where George Bailey, the Bank of England Governor, said that the BoE would end support for UK Gilts by the end of this week. What does this mean for the Pound specifically and other sterling-denominated UK assets like equities?
TN
Oh gosh, we’re likely to see more devaluation of the Pound. There’ll be pressure on the Pound. Well, maybe not devaluation, but depreciation of the Pound. UK pension funds and other guiltholders will likely have to sell assets if the BoE is stopping their intervention in that market. They’re likely to likely to see downward pressure on those prices. So holders of those assets, like big pension funds, will have to use other assets to pay for their collateral for those investments. So it’s going to be ugly all around once the BoE stops because the market for guilt is so weak.
TN
And we’ve seen for the Bank of Japan, we’ve seen for the Fed, for different auctions, different government debt auctions, there have been zero takers for government debt auction. And that tells me they’re not paying enough. The interest rates for that debt has to rise because people feel like inflation and interest rates are going to rise. So these governments need to offer their debt out at a higher rate so that people can make a profit with it, given the inflation environment.
BFM
And Tony moving on to China with a Party Congress meeting happening very soon, and with Xi Jinping set to win an unpresented term, what economic implications would that have for China? And with growth slowing down across the world, how will they aim to achieve the goal of common prosperity?
TN
Yeah, Common Prosperity as a definition can be really taken as raising people up, or it can be taken as pushing kind of those achievers down. Okay. And if you look at China’s history in the late 50’s and the 60’s, as you know, Mao Zedong really pushed those achievers down through the great famine and all this other stuff. So my fear is that as Xi Jinping has consolidated his power, he’s going to start well, he’s already started a couple of years ago, pushing some of those economic overachievers down like Jack Ma and other people.
TN
So I really do worry coming out of this Party Congress that we get a much more restrictive Chinese economy. We’ve already seen foreign investor sentiment sour on China, and we’ve already seen with code lockdowns, with supply chain lockdowns and other things, there has been a functionally more restrictive environment and with sentiment souring as well.
TN
I’m not optimistic, at least in the short term. The Chinese government, whether it’s Xi Jinping or other elements of the Chinese government, they’re going to have to do something to reassure the world that they are a good faith partner in global supply chains and for manufacturing. It’s not going to make them happy to do that. But if they want to continue growing at the rates they have grown, they’re going to have to do that.
TN
So when I say I’m not optimistic about China, I’m not saying China is going to crash. I’m saying I think they’re going to have some pretty mediocre growth rates in the coming years because of the economic environment, regulatory environment and market environment that they’ve cultivated of late.
BFM
OK, Tony, I want to stay in Asia and I want to look specifically at Japan because the Yen weakened to a fresh two-decade low, hitting 146 to the US dollar. What do we make of this? Is this really on the back of Corona vowing to maintain its very accommodative monetary policy?
TN
Well, they have a choice. They can either support the yen or they can buy government bonds. And they’ve continued buying their bonds. So I think they’ve made a choice not to support the currency. And with the strong US dollar position and Janet Yellen made some comments today saying, again, saying that it’s really not the US’s responsibility to maintain the currencies, economies of other parts of the world. It wasn’t those exact words, but it was similar. That will likely push the dollar even stronger and we’re likely to see even more depreciation of the Japanese yen.
TN
So there is a lot of pressure on Japan right now, and the Bank of Japan really has some decisions to make about how they’re going to approach that. Maybe they’re okay with depreciating their currency, but it will fundamentally change things like their imports of energy. They’re very dependent on imported energy. They’re very dependent on imported, say, raw materials like metals for their manufacturing. So this really changes their approach to managing those imports.
BFM
Tony, thanks very much for speaking to us this morning. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.
BFM
Yeah, I like his comments on the yen. Right. At what point does it then become really painful for the Japanese economy? Net energy imported, clearly LNG from Malaysia is one of the key imports. What does this then mean for inflation? But it’s one country where inflation has been ultra low, almost as low as ours, I think barely 2-3% for them. But for them it’s a bit of a shocker because they’ve been in a deflationary period for more than ten years.
BFM
Yeah, and his comments on China, I think he said that growth would likely be slow over the next couple of years, and I guess Xi Jinping and China will unlikely dial back on its Zero Covid policy next week. It looks very unlikely at this point.
BFM
I mean, everyone’s hoping to see some kind of announcement to that vein. But again, lots of things to look out for in the weeks ahead.
BFM
We just heard headlines coming out Shanghai, parts of it under even more lockdown.
BFM
Well, very quickly, let’s take a look at some good news. I guess that’s coming out of Australia. We have contest airways. They said their first half year profit will jump to as much as 1.3 billion Australian dollars as travel demand accelerates and the airline stabilizes operations after a prolonged and bruising period of cancelations and delays. This ends a streak of five consecutive half yearly losses totalling 7 billion Australian dollars.
BFM
It said that the frequency of scrap flights, late departures and loss backs are all improving. CEO Alan Joyce said it’s been really challenging time for the national carrier, but the announcement shows that how far the airline has actually improved, and they’ve seen big improvements in their operational performance and acceleration in financial performance as well. And this takes some pressure off Joyce.
BFM
Well, if I look at the street, they like this stock. Twelve buys, three holes. One sell. Contest at close was $5 and 17 Australian cents. Tucker price, 653.
BFM
All right, 718 in the morning. We’re heading into some messages. Stay tuned. BFM 89 Nine you have been listening.
BFM
To a podcast from BFM 89 Nine, the business station. For more stories of the same kind, download the VSM app.
The Bank of England surprised markets by announcing that it would buy long dated government bonds in order to stabilise capital markets. Tony Nash, CEO of Complete Intelligence explains why and what does this mean for the Pound.
Transcript
BFM
Good morning. You’re listening to the Morning Run on Thursday the 29 September. I’m Shazana Mokhtar with Wong Shou Ning. Now, in half an hour, we are going to discuss the political future of Crown Prince Mama bin Salman, or MBS of Saudi Arabia, now that he’s been named the Prime Minister of the country. But as always, let’s kick start the morning with a look at how global markets closed.
BFM
Yesterday, US markets had a very good date was at 1.9%. S&P 500 up 2%, while Nasdaq was up a whopping 2.1%. Meanwhile, in Asia, it was all red. Nikkei was down 1.5%, hong Singh was down a whopping 3.4%. Shanghai and Times Index both down 1.6%, while our very own FBM KLCI was down 0.6%.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks for joining us. I want to start off with moves by the bank of England that said it would move to buy long dated government bonds in order to stabilize capital markets. Can you talk us through what the BoE is trying to do and whether this will ultimately be successful?
Tony
Yes. So here’s what happened. You had some pension funds who bought debt, debt instruments called Guilt, and they used those gilts as collateral to borrow more money to buy more debt instruments. And they use that as collateral to borrow more money to buy more instruments. So they were many times leveraged on these government debt instruments. And when the value of those gifts declined, they had to provide collateral against the loans they had taken out to buy that debt. So it’s a very circular kind of series of events that’s happened. So because these pension funds got in trouble, the UK, the bank of England wanted to prevent their insolvency, of course, because many of them are government pension funds. So since the bank of England has nearly endless currency, they can help the government come to a relatively orderly decline. So is it ideal? No, but there was some messaging out from the new Prime Minister in Whitehall that was very disturbing to government bond investors and that triggered the sell off and then that triggered a multibillion pound rescue from the bank of England.
BFM
Okay, I want to stay on the topic of the United Kingdom, but us about the currency. They must be the only G seven countries still doing quantitative easing in some way. Where do you think the pound is heading? Dendu?
Tony
Well, because of the energy environment, they’re going to be spending more money on subsidies to help the British people through the winter and more pound? Denominated spending actually makes the pound stronger, but you have aggressive quantitative easing and you have a relatively stronger US dollar. It’s possible that we see the pound decline, say, 35% more, unless something dramatic happens, like another event like today or another event by the government that really erodes credibility, I don’t see a lot more decline happening, but it’s a weird year. It’s a weird few years that we’re having right now. Right. So I think on some level it’s really hard to tell. And the problem with losing credibility is that you lose credibility. And if they erode even more credibility, it could be worse than anybody thinks. So I think that’s a small chance. I think we’re probably in a range at this point.
BFM
And if we take a look over at the US, we have seen federal officials reiterate the very hawkish stance that they have. But San Francisco Federal Reserve Bank President Mary Daly said that the bank is resolute by bringing down high inflation, but wants to do so as gently as possible so as not to drive the economy into a downturn. Do you think it’s possible at this point to engineer a soft landing, or is a recession inevitable?
Tony
I think it’s possible to engineer a softish landing. I think the problem with the Feds facing as they were very slow to respond to inflation, and so now they’re trying to respond as quickly as they can, and they’re responding in a very kind of brutal kind of way. Mary Daily coming out with these as gently as possible comments are good. And that’s new. Neil Cashari yesterday said he’s another Fed governor. He said there is the risk of overdoing it on the front end, meaning that the Fed could raise rates too quickly. So some of these governors are getting out with messaging, trying to soften the Fed’s hard message over the last couple of months. So the wording from the Feds, ongoing wording generally from especially JPOW, has said that they’re going to be ongoing aggressive hikes, and that’s scaring people. So, like, the Fed needs to be less aggressively hawkish in their language. So that doesn’t mean they turn dovish. That doesn’t necessarily mean they start doing QE. They just need to be less aggressively hawkish. And that’s just toning down the language. I think it’s a little bit too little too late in as much as markets have fallen by, say, 23%, I think, since the highs.
Tony
But I think if they start inserting some less aggressively hawkish language, we can have a smoother glide path to balance, meaning higher interest rates, more moderate equity markets at a slower pace.
BFM
Okay, Tony, can you help us understand what happened today in markets? Because I’m a little bit confused in the sense that US ten year treasury yields fell the most since March 2020. On a day like this, equities shouldn’t go up, but it did. Why?
Tony
Well, I think equity investors are seeing what the bank of England did, and I think on some level they see equity markets versus central banks as a bit of a game of chicken. And the bank of England blinked. And I think equity investors are hoping that the Fed will slow down or blink. This is not a pivot. Meaning when people talk about the Fed and say a pivot, they mean pivoting to quantitative easing and pivoting to dovish language. I don’t see that at all, but I think equity investors are seeing a chance of the Fed becoming less aggressively hawkish, as I was saying. So I think that’s really what happened is just a quick breath think, oh gosh, maybe they’re going to slow down a little bit, which would be positive for equity markets.
BFM
And if you take a look at the Nordstream gas pipeline disruption, that does seem to have changed the energy calculus in Western Europe. How do you think it’s going to affect the dynamics of energy prices over there, especially with winter looming?
Tony
Yeah, I think it will affect, but there isn’t a lot of gas coming by Nordstream. There are other pipelines bringing gas to Europe, so it’s really, at the moment, more perception than reality. So Europe has a fair bit of gas and storage for winter. It’s 87% of their goal, so they’re in pretty good shape. They’re not in great shape, but they’re in pretty good shape. They can make it all the way through winter with what they have in storage, but they aren’t reliant on Nordstrom to fill their reserves further. So I think the kind of the gut punch on this is that it’s a pretty damaging leak and so it would be really hard to get it back online. If Russia say something happened with a resolution of UK, sorry, Ukraine, Russia, and there was optimism that Russia could turn on the taps again, that would be really hard to achieve. So it’ll be an expensive winter for energy in Europe. But Nordstream doesn’t really impact it all that much. It’s more, say, the long term hopes and expectations for Nordstream.
BFM
Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead. Really assessing what’s happening over in the UK with the actions by the bank of England overnight. That has helped somewhat to calm the plunge in the pound sterling that we’ve seen over the past few days. I think this pound has rallied, but how long this equilibrium will last, I think, is anyone’s guess.
BFM
Well, this morning pound against ringgate is 5.0260 at the lowest in the last two days, if I’m not wrong, 4.8. Right. So it has truly, truly recovered. But volatile markets ahead, I think still question marks about whether this trust economic policy makes any sense. Confusion over the tax cuts, how they’re going to pay for it, reverberating around global markets because we’ve seen actually global bond yields peak. Question about whether there will be more activities by central banks to intervene, to prop up their currencies or to restore come to their own respective markets, because we saw that in Japan. And apparently even South Korea says it plans to conduct an emergency born buyback program.
BFM
Indeed, we do see also that the yuan is coming under pressure, and China central bank has issued a strongly worded statement to warn against speculation after the currency dropped to its lowest versus the dollar since 2008.
BFM
I love the language. The language is released yesterday. Do not bet on one way appreciation or depreciation of the yarn, as losses will definitely be incurred in the long term. Can’t spell it out more clearly than that, right? Indeed.
BFM
716 in the morning. We’re going to head into some messages. And when we come back, what does long or need more? Another quarry or preservation of its forests? Stay tuned. BFM 89.9 you have been listening to.
This month, the S&P 500 officially hit bear-market territory—meaning a fall of 20+ percent from recent highs—and investors everywhere are looking for some way to predict how long the pain could last.
Machine learning startups specializing in “nowcasting” attempt to do just that, by analyzing up-to-the-minute data on everything from shipping costs to the prices of different cuts of beef. In times of economic volatility, investors and executives have often turned to market forecasts, and ML models can offer a way to absorb more information than ever into these analyses.
One example: Complete Intelligence is a ML startup based outside Houston, Texas, that specializes in nowcasting for clients in finance, healthcare, natural resources, and more. We spoke with its founder and CEO, Tony Nash, to get a read on how its ML works and how the startup had to adjust its algorithms due to market uncertainty.
This interview has been edited for length and clarity.
Can you put the idea of nowcasting in your own words—how it’s different from forecasting and the nature of what you do at Complete Intelligence?
So Complete Intelligence is a globally integrated machine learning platform for market finance and planning automation. In short, we’re a machine learning platform for time series data. And nowcasting is using data up to the immediate time period to get a quick snapshot on what the near-term future holds. You can do a nowcast weekly, daily, hourly, or minutely, and the purpose is really just to understand what’s happening in markets or in a company or whatever your outlook is right now
And what sort of data do you use to fuel these predictions?
We use largely publicly available datasets. And we’re using billions of data items in our platform to understand how the world works…Macroeconomic data is probably the least reliable data that we use, so we use it for maybe a directional look, at best, at what’s happening. Currencies data is probably the most accurate data that we use, because currencies trade in such narrow bands. We use commodities data, from widely traded ones like oil and gold, to more obscure ones like molybdenum and some industrial metals. We’re also looking at individual equities and equity industries, and we track things like shipping times for goods—shipping times…are usually pretty good indicators of price rises.
Who are your clients, and how are the nowcasts used in practice?
Our clients range from investors and portfolio managers, to healthcare firms and manufacturing firms, to mining and natural resources firms. So they want to understand what the environment looks like for their, say, investment or even procurement—for example, how the current inflation environment affects the procurement of some part of their supply chain.
In fact, we’re talking to a healthcare company right now, and they want to nowcast over the weekend for some of their key materials. In an investment environment, of course, people would want to understand how, say, expectations and other variables impact the outlook for the near-term future, like, days or a week. People are also using us for continuous budgeting—so revenue, budgeting, expenses, CFOs, and heads of financial planning are using us…to understand the 12- to 18-month outlook of their business, [so they don’t have to have an annual budgeting cycle].
Tell me about how the AI works—which kinds of models you’re using, whether you’re using deep learning, etc.
There are basically three phases to our AI. During the pre-process phase, we collect data and look for anomalies, understand data gaps and how data behaves, classify data, and those sorts of things.
Then we go into a forecasting phase, where we use what’s called an ensemble approach: multiple algorithmic approaches to understand the future scenarios for whatever we’re forecasting. Some of those algorithms are longer-term and fundamentals-based, some of them are shorter-term and technical-based, and some of them are medium-term. And we’re testing every forecast item on every algorithm individually and in a common combinatorial sense. For example, we may forecast an asset like gold using three or four different forecast approaches this month, and then using two forecast approaches next month, depending on how the environment changes
And then we have a post-process that really looks at what we’ve forecasted: Does it look weird? Are there obvious errors in it—for example, negative numbers or that sort of thing? We then circle back if there are issues…We’re retesting and re-weighting the methodologies and algorithms with every forecast that we do.
We’ve had very unique market conditions over the past two years. Since AI is trained on data from the past, how have these conditions affected the technology?
You know, there’s a lag. I would say that in 2020, we lagged the market changes by about six weeks. It took that amount of time for our platform to catch up with the magnitude of change that had happened in the markets. Now, back then, we were not iterating our forecasts more than twice a month. Since then, we’ve started to reiterate our forecasting much more frequently, so that the learning aspect of machine learning can really take place. But we’ve also added daily interval forecasts, so it’s a much higher frequency of forecasting and in smaller intervals, because we can’t rely on, say, monthly intervals as a good input in an environment this volatile.
Energy has taken a huge downside hit this week, in the wake of the OPEC+ announcement, US refining capacity utilization declining, etc. What’s happening? Why are we seeing differences between physical and paper crude markets?
Also, there was talk months ago about a new energy supercycle. Is that real? With China-Taiwan-US tensions tighter than they’ve been for years, we’re seeing Chinese tech stocks just muddle through. We haven’t seen a major hit – as if China tech will see major fallout from these tensions – but we also haven’t seen a major bump – as if China is expected to stimulate out of this to win domestic hearts and minds.
Also, could possible government intervention to solve China’s mortgage credit crunch be holding back the broad stimulus we’ve all expected for a couple of quarters?
Key themes:
1. Low energy (prices)
2. China tech & stimulus
3. Equity upside?
4. What’s ahead for next week?
This is the 29th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
1:51 Moves we’re seeing in energy markets – why there’s a fall?
3:39 How much of the energy moves is seasonal?
6:58 EIA computer “glitch” problem
7:24 What happened in the refining capacity now at 91%?
8:30 Capacity utilization fall – is this a statement about the denominator or falling demand?
10:14 Is the commodities supercycle happening?
12:13 China and technology – KWEB is not falling or rising
14:00 Will the Chinese government help real estate developers? Will that take away from possible tech stimulus?
16:58 Viewer question: Is there still upside benefit to SPY?
22:18 How will be the start of the Fed pivot — 25 or 50 bps rise?
24:45 What’s for the week ahead? Listen to the podcast version on
Spotify here:
Transcript
TN: Hi everyone. Welcome to The Week Ahead. I’m Tony Nash, and today we have Tracy Shuchart and Albert Marko joining us.
We’re going to walk through a number of topics today. First is energy prices, low energy prices. We want to understand why that’s happening and what’s around the corner. Next, we’re looking at China tech and potentially the stimulus in China and how that will impact tech.
Finally, we want to look at equities. What remaining upside is there in equities right now, given the environment we’re in? Before we get started, I would like to ask you to like and subscribe to the channel. Also give us your comments. We’re very active and respond to comments, so please let us know what you’re thinking. If there’s something else we should be covering, let us know.
Also, we have a promo for our subscription product, CI futures, right now for $50 a month. With CI futures, you get equity indices, commodities and currencies reforecast every week. And you get all of those, plus about 2000 economic variables for the top 50 countries reforecast every month. So please check it out on the link below. $50 a month for CI Futures.
Okay, so guys, we’ve had a really weird week with the Pelosi visit to Taiwan, geopolitics and the risk associated with geopolitics is kind of back on. We’re not really sure exactly how that’s going to resolve, but I’m really interested in the moves we’re seeing in energy, Tracy, and we’ve seen energy really fall throughout the week and I’m curious why we’re seeing that, particularly with crude, as we’ve seen geopolitics dial up. I know there’s not a perfect correlation there, but we typically see crude prices rise a bit with geopolitics.
TS: I think, it’s a combination of a lot of things. First of all, we’ve had which is ramped up to 200 million barrels being released to the SPR, which is fine initially, but we’re looking at the cummulative effect of this. In fact, we’re releasing so much so fast that now those barrels are actually finding their way overseas because we have nothing else to do with them. We can’t process that much right now.
And so we’re looking at that which is putting a damper kind of on the front end. We’re also looking at the fact that open interest is almost at the lowest in a decade, which means there’s nobody participating in this market. People are just not participating in this market.
In addition, we have physical traders that are completely nonexistent in this market anymore. They’re all trading via clear port on the OTC market as I’ve talked to actual physical traders, they don’t even want to be involved in this volatility.
And so that’s also taken a lot of open interest out of this contract. So this contract is easily pushed around because there’s just not of liquidity.
TN: How much of that is seasonal? How much of that is because it’s early August, late July, early August?
TS: It is seasonal. I will give you that because this summer is the summer lag. We generally see more participants in getting in September, and we’ll have to see how that kind of plays out.
But in general, the market is, this whole dive started in, was this market was factoring, we’re going to have this huge recession. Right? It’s going to be low berry session. Demand is going to go up.
And then we have this EIA discrepancy. The discrepancy was on gasoline demand. Actual gasoline demand versus what the DOE is reporting. Right? And ever since they had that “glitch,” where we had two weeks of no reporting whatsoever, those numbers suddenly changed.
And now they’re putting gasoline demand at below 2020 numbers at the height of COVID, which is to me,
not to sound conspiratorial, but to me, there’s just no way that we are below 2020 numbers. Right. And if you look at Gas Buddy demand, which is they look at a kind of a different look. What they look at is how
many gallons are being sold per station across the nation. And that’s how they kind of factor in what demand is. DOE is at the midpoint, right? So it’s like the midstream level. But those numbers should
eventually correlate. That discrepancy should eventually get together.
TN: So Gas Buddy is showing demand still growing, and DOE has it kind of caving. Is that correct? You know what I’m saying?
TS: Okay, yes. First of all, I think we need to look at the 914 numbers, the monthly numbers, which are definitely lagging. They’re too much behind, but they have been correct on production. Right? So I think they have weekly production at 12.1 million. Last 914 monthly report was at 11.6 million. So it is lagging information. But we have to start really looking at these weekly numbers and what the DOE is reporting and what they’re not reporting.
TN: If anything, what I’m seeing just observationally traffic seems to continue to grow. Like, I’m seeing more people going back into the office. I’m seeing more people take drives where they wouldn’t have taken long drives before. So what we’re seeing out of DOE doesn’t really match with what I’m seeing observationally. I could have selection bias, but it just doesn’t seem to match what we saw in April, May
of 2020.
AM: Tracy is absolutely spot on on that. I actually had a few people note that the EIA computer “glitch” problems set all this thing off in the DOE inventory shenanigans. It’s starting to gain more traction with everybody. It just doesn’t add up. When things don’t add up, bad data comes in, and it’s politically advantageous for the moment try to get gasoline down, going into midterms. I mean, Tracy is absolutely 1000% spot on that assessment.
TN: So, Tracy, I want to ask you a couple of questions. We’ve got a chart on refinery capacity utilization, and it shows capacity utilization at about 91%. So last month we were talking about being at 94%. Now it’s at 91%. What’s happened? Has the Denominator going?
TS: Well, that’s not actually a bad thing. Let me tell you that. Refineries operating at 94% 95% leads to a lot of problems. You’re going to see problems with maintenance, you’re stretching that capacity. Personally, I love anything over 90, 91. I’m much more comfortable with than 94 95%, which we got to, which is very stressing to me because you’re stressing those refineries, right. And that’s going to lead
to problems down the road. So for that to come down, it’s not a big deal to me, to be honest. Anything above 90, great. We’re good.
TN: Okay, so we’ve seen gasoline prices fall as we’ve seen capacity utilization fall. And so is that a statement about the, say, the denominator meaning the available capacity, or is that a statement about falling demand?
TS: I don’t think it’s a statement about necessarily anything. Okay. To be honest. Is the expectations around say that the gasoline price falling, is it expectations maybe around recession, but given the job numbers we got? Expectations about being around recession right when we’re seeing these prices fall. And I think we have a lack of participants in this market, especially lack of participants in the physical markets. The physical guys, like guys that trade for BP and Shell, which is where they’re just not in this market anymore because it’s too volatile, it’s too pulled around, and they can’t deal with that right now. So there’s nothing structurally changed about the physical markets right now.
You have to understand, too, is that the paper markets far outweigh the physical markets, meaning that there’s far more paper barrels traded than there are actual available physical barrels on the market
to be traded.
And when we look at a contract like WTI, which is actually physically deliverable, and we look at the market participants that are involved in deliverability, that is shrinking, shrinking margin, and then you look at something like the Brent contract, is completely just a financial contract.
So there’s a lot of hanky panky goingon in that market.
TN: Okay, now one last question while we’re on crude. Months and months ago, we kept hearing about this emerging commodities super cycle. And as we’ve seen commodities fall over the past few months, there have been some questions about is that really happening? So where are you? Do you think we’re in the early stages of another super cycle or do you think we’re just kind of modelling through?
TS: I actually think we’re still in the early stages of a super cycle. I mean, I think we’re kind of like I think my best comparison sake would be like, let’s look at the 1970s, right? And everybody’s looking at that ’73, ’74 when the oil embargo happened. But I actually think we’re closer to the ’67, ’69 era where we saw inflation kind of hit. Right. They tried to hide us into a recession, and then we had another peak in ’73, ’74 because issues with the market and then we have a third wave. So I actually think we’re only in this first wave of an inflationary cycle as far as commodities are concerned, okay.
Because we’re still in a structural supply deficit across not just the energy sector, but base metals, agriculture, et cetera. but you have to think your input cost for metals and for agriculture, it’s all energy.
So if energy is high to see inflation in energy costs, then you’re going to see inflation across all
of these commodities. We’re at $90. We were at negative $37 two and a half years ago. So to think that we’re crashing? You know.
TN: Okay, let’s switch over to China and technology and kind of talk through a few things with Albert. Obviously. Albert, we spoke earlier about Pelosi’s visit to Taiwan and US. China Taiwan affairs, and I’d recommend anybody view that that we published on Tuesday night US time. But I’m curious, Albert, as we look at and we’ve got KWEB up on the screen, which is an ETF of Chinese technology companies, it’s kind of middling. It’s not really falling. It’s not really rising. It seems like people are a little bit uncertain about what’s happening with Chinese tech. We have the closures of different cities. We have one of the big manufacturing cities that’s going zero COVID now.
And we obviously have the China Taiwan issues. What are your thoughts on China tech right now? And what should we expect over the next, say, two to three months?
AM: Well, over the next two to three months, I think China is going to be forced to stimulate. Once they stimulate names like KWEB, Alibaba actually, I really like Alibaba. There’s some good things happening there. I mean, the delisting stuff is a risk and it’s always been a risk, mainly because Gensler and Yellen have been trying to suppress the Chinese to stop stimulus because it hurts the United States and their plans to fight inflation.
So, yeah, I’m really bullish on KWEB. I really like it at 25 26 level. It’s not that far from where we are right
now. For the Chinese tech, it’s like, I don’t really think domestically, there’s too many problems domestically for KWEB. For me, it’s just all the delisting risk and that shot, the warning shot across the bow from the US.
TN: Okay, so when you talk about stimulus, I want to understand a little bit of the substitutionality of stimulus. So if we have this big mortgage crisis in China where owners aren’t paying their mortgages,
and that’s even worse on the property developers, and there are trillions of dollars at risk there, do you think the Chinese government will intervene and help those property developers? And if they do, will that take away from stimulus that could help technology companies?
AM: They will step in, but they’ll step in selectively for the most systemically important property developers. Not just the best connected, but the ones that touch the most debt and whatnot. So they don’t want things getting out of control. So for sure they will step in. I don’t think it will take away from the tech
sector at all. I think that the Chinese have been pretty pragmatic and diversifying how they get money into the system, whether it be other Asian countries, the US, Europe and whatnot. But they’re definitely in line right now to stimulate the economy going into the fall.
TN: Okay, great. If you’re trying right now and you’re talking about stimulus, that is to make up for kind of the COVID Zero close downs, but it’s also, I would assume, kind of winning some of those hearts and minds going into the big political meetings in November. Right, so you’ve whipped up nationalism with the Taiwan thing over the last couple of weeks and now you need bridge to get you to November. So you’re going to put out a bunch of stimulus to keep people fairly nationalistic and obedient. Is that fair to say?
AM: Yeah, that’s definitely fair to say. I think going even a little bit further than that is keeping the circle around Xi happy. That nexus of connected families that make money off the tech sector manufacturers. They need to be able to solidify it economically and stimulus will be targeted like that. And so when you say keep those families happy. You’re talking about skimming, you’re talking about sweet deals on contracts and that sort of thing.
TN: And I just want to make clear that doesn’t only happen in China. That happens in every country, right?
AM: Oh, every country you can imagine that happens. How politically connected with the donors, the political parties and so on and so forth. I just want to make clear to viewers. Like everybody.
TN: Yeah, I just want to clear to viewers, we’re not just picking on China. This happens everywhere.
AM: No, this is nothing negative towards China whatsoever. This literally happens in every country in every single country. Yeah.
TN: We had a question come in from a regular viewer talking about one of Sam’s calls. He’s not here, so he can talk behind his back today. The question was, Sam had talked about risks being to the upside a while ago for SPY, for the S&P 500. Now that we have had a mini rally, does he still see higher as the path of least resistance or is the risk reward fairly balanced here? I mean, we’ve seen a really nice uptick in the S&P and equities generally. Do you think there’s still upside benefit, or would you be a little bit hesitant in terms of the broad market?
AM: I’m bullish for a week, basically going a week, maybe two. I think that the CPI number is probably going a little bit lower than people think. And then all the peak inflation people are going to come out the woodwork and then they’re going to talk about Fed pivot, whether it’s real or not. I don’t think the Fed actually pivots. I think they just build a narrative of a pivot, if that makes sense, to rally the market.
But going forward, the economy is not a good footing. The job numbers are just not accurate. It’s a purely political headline for Biden going into the midterms. CPI is going to follow the same suit. They’ll probably have a 50 basis point rate hike in September and say that they’re slowing down. And whether it’s real or not.
TN: I want to question you just to push back a little bit. When you say the economy is not on a good footing, what do you mean? Help me understand how it’s done on a good footing?
AM: Well, the whole jobs? Listen, 20% of people don’t have a job. 19% of people have two jobs or more. You’re sitting there making this glorified headlines thatBiden is great for the job market and the economy, but it’s just not accurate. We have people that are struggling paycheck to paycheck more than any time in the last 20 or 30 years. So the underlying economy, forget about the top half that are millionaires that are buying whatever, the bottom half of the country is an absolute recession. So that’s what I’m saying the economy is not good.
TS: I mean, I totally agree with Albert. I mean, I’ll make a case for the bullish side. Let’s put it this way. So not a single trades work this year. Average hedge fund scrambling on how to salvage this year. There’s no other choice, really, but to get long. I mean, we have long going girlfriends been shell shocked. Font, shitty year. Value guys waiting to buy the dip in cyclicals. So I think that until when November comes and we have redemptions and these guys are faced with losing money from clients, I think that right now they have no other choice than to buy the dip, which is really interesting because that coincides with midterms. But not to put on my tinfoil hat there. So that’s my case for we may see a little bit higher than people that anticipate.
Even though I agree we’re still in a bear market. Albert makes a ton of good points, totally agree with
him 100% on that. But for the next few months, we may be looking at different kinds of things, especially because we also have the CTAs that are still super short.
So we have the possibility that we could see a short squeeze now if hedgies start
eating up the market and… This is exactly what the administration wants to see, because they want to see the S&P higher going into Midterm electric if it makes them look great. Of course.
AM: And Tracy is right. And this goes back into the oil numbers from the DOE and the EIA Shenanigans. They lower gas, they try to get inflation lower. They rally the market going into Midterms. It’s just the way it is. Now, going back to the economy, real quick, Tony, I see across the street the US consumer credit was $40 billion. I mean, people are spending and collecting debt like it’s going out of stock.
TN: That’s not a good number. You saw my tweet this last week about the $15 grapes. I mean, that sounds ridiculous, but people are having to. I talked to people about their electricity bills and they’re doubling and tripling over the last few months. And so people are having to do this. Rents are doubling in New York and so on and so forth. So it’s hitting everybody. And people are having to tap into consumer credit just to make ends meet.
AM: Just for the viewers, Tony, the forecast was 27 billion. It came in at 40.
TN: Wow. That’s a slightly overestimate, I would say. Let me ask you a quick question about the Fed pivot. Okay. You say the Fed is going to kind of act like they pivot but not actually pivot. So would that mean and I know everyone’s been on Twitter today or on social media saying, oh, the job’s number puts 75 basis points in focus again, all this stuff. But would the start of a pivot be 50 or 25 basis point rise?
AM: The start of a narrative of a pivot would be 50. But let’s just be honest. Inflation is not going away. They can fake a CPI number, maybe one, maybe two months. But come October, December, January, and inflation is raging, nine point whatever, 9.5%, 10%. They are going to have to keep going 75 basis points.
TN: So when you talk about a pivot, you’re talking about the beginning of a pivot, maybe a 50 basis point rise in September or something just to kind of ease nerves off a little bit?
AM: Yeah, that’s exactly what it is. It’s just the beginning of a narrative to move the market. It’s all it is.
TS: Okay, if we went 50 instead of or even 25 instead of 75, which the market is expecting, the barn market would freak out.
TN: Now what happens to commodities in that case, Tracy, if we’re in September and we go 50? You’re
going higher.
AM: Okay, this is the problem I keep telling screaming people and why I didn’t think that’s why I didn’t think this rally was a good idea is because all of a sudden now you’re going to create this stupid pivot narrative and do 25 or 50 basis points. But then, like Tracy just mentioned, commodities are going to rip. What’s that going to happen then? We’re going to have stage two of inflation coming around in 2023. That’s going to make this like nothing.
TN: Yeah, but as long as it happens after November, I think. Everything’s fine. Right. No, seriously, we have to think we’re in that. We’re in those closures.
TS: You have to think everything is political right now. So every decision is political right now and you have to factor that into kind of your investment thesis right now.
AM: Tracy’s absolutely right. I was just talking to a client. I said I don’t want to hear anything after November of this year. This era is this era right now. After November is a different era. We’ll talk about that accordingly in the next month. But until now it’s just a pure political game.
TN: What are you guys watching in particular for the week ahead?
AM: CPI. I think the CPI comes in a little bit lower than people expect and will rally the market for another 100 points. Like a seven handle or something? I think it’ll be a seven handle.
TS: I mean, everybody is watching CPI, I agree. I’m watching CPI as well. I think what’s really interesting going into this next week is I would start looking at Basin Industrial Metals and miners at this point because I think that they are lagging crude, they have been lagging crude oil. But we’re kind of starting to see a little bit of turnaround. So my focus really is going to be on base and industrial metals.
This is the second episode of The Week Ahead in collaboration of Complete Intelligence with Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week. Among the topics: industrial metals, energy markets, natural gas, China’s flood of liquidity and property market, CNY, and bond market.
TN: Hi, everyone, and thanks for joining us for The Week Ahead. My name is Tony Nash. We’re with Tracy Shuchart, Nick Glinsman, and Albert Marko. To talk about the markets over this past week and what we’ve expect to see next week. Before we get started, please subscribe to our YouTube channel so you don’t miss any of the upcoming episodes.
So, guys, this week we saw kind of a whipsaw in equity and commodity markets with a slow start, but a lot of action mid week. And commodities seem to kind of extend gains until the end of the week. We saw bonds really wait until Friday to start taking off, but they took off quite a bit today. And part of that may have been on the back of the retail sales print that we saw. That was pretty disappointing. So, Tracy, do you want to kick us off a little bit with talking about commodity markets and energy?
TS: Sure. I mean, obviously, we’ve seen a big push in the oil market. Right, in WTI and Brent this week. We’re definitely a bit overbought. But that said, what I think is happening here is we’re seeing a shift from sort of growth to value. I think the markets are pricing in the fact that OMA crime is over. Right. And the Fed may raise rates. That’s putting pressure on growth and giving kind of a boost to the value market. And we’re kind of seeing a chase here a little bit in the oil markets.
As far as if we look at the natural gas markets, it’s been very volatile this week, not only in the US, but global markets. I think that will continue. And we saw a big push up on Wednesday, and then we saw a big pullback, but that was due to weather. But now we’re looking at this weekend, we’re having another cold front. And part of that reason was also because we discovered that Germany had less natural gas in storage than initially thought. So that market, I definitely think it’s going to continue to be very volatile. So try lightly in that market there’s.
TN: You mentioned the Germany supply side of the market, but what does supplies look like, say in the US and other parts of Europe? Are supplies normal? Are they low? What is that dynamic?
TS: Yeah, we’re pretty much normal in the US, and we’re set to in this year. We’re set to pretty much overtake the market as far as the export market is concerned. That would mean taking over Australia and Qatar because of the amount that we’re building out in the delivery system in Texas. But the supplies here are okay. The problem is within the United States is that the distribution is uneven.
So you’re talking about the Northeast, where you’re seeing local natural gas prices a lot higher there. Then you’re seeing, say, in Henry Hub, which is the natural gas product that trade that you’re trading.
TN: So I saw some just to get a little bit specific on this. I saw some news today about some potential brownouts in, say, New York or something because of this winter storm. How prevalent will that be? Maybe not just say, this weekend going next week, but for the rest of the winter. Are the supply problems that extreme?
TS: Yeah, I think you’re going to have a lot of problems in the Northeast. And I’ve been alluding to this over the last few months saying that they have decided not to go ahead with pipelines. They’ve shut pipelines. They kind of cut off their supply because they don’t really want to pursue that Avenue anymore.
However, it’s turning out to be a particularly cold winter, and that’s a lot of pressure on that market. And that’s why we’re seeing $11 natural gas prices up in that area as opposed to $4 in Henry Hub.
TN: Right. Meantime, Albert’s warm down in Florida, right.
AM: Yeah. Well, I wanted to ask Tracy what happens if we have an extended winter where the winter temperatures go into late March or early April.
TS: Then that’s extremely bullish. That’ll be extremely bullish for domestic supplies because domestic supplies will be in higher demand than they are normally seasonally, especially at a time where we’re a giant exporter right now.
We just came to save the day in Europe with 52 now cargo. So we’re exporting a lot if we have an expanded winter here. Supplies are unevenly distributed. We’re going to see I think we’ll see higher prices in out months that we normally see a pullback in those markets.
TN: Great. Texas, thanks you for those cargo, by the way. We really appreciate it. Okay. What about the broader commodity complex? What are we seeing on, say, industrial metals and precious metals?
TS: So obviously, those have been very bullish are going to continue to be bullish because they’re in deficit. As far as if we’re talking about battery metals and such, I think we’ll continue to see that we’re seeing a little bit in the platinum markets. We’re seeing some demand. I think there’s going to be bigger demand this year.
TN: So we’ll show some platinum on screen here so our viewers can see kind of where the platinum price is and where it’s expected to go.
TS: Yeah. So platinum demands expected to grow because of the automobile markets and because of Palladium is so high they can substitute platinum for that. But that may be capped for the rest of the year, and then we may continue to see higher prices going into 2023.
TN: Okay. So when you say that’s growing because of automotive, is this growth in ice ice vehicles. Okay. And is that happening because and I don’t mean these leading questions, but is that happening because the chip shortage is alleviating and we’re having more manufacturing in ice vehicles?
TS: I mean, that’s part of it. But platinum is used for catalytic inverters Palladium. And because of the fact that there’s platinum happens to be a lot less expensive. Right now. And also there’s more of it right now. So we’re seeing kind of demand pulled to the platinum industry. And I’ve kind of been worrying about this for the last couple of years that this was going to happen.
And now we’re kind of seen that comes to fruition because it takes a couple of years to retool and everything to sort of switch that metal. So I think demand looks good right now for that. We may see it capped a little bit. That may go up again. But if we look at this chart, technically speaking, I would say anywhere between 1005 a 1010. If we kind of Zoom above that, then that market could go a lot higher.
TN: Right. So short term opportunities in platinum, medium term, not so much, but longer term back in.
TS: Yes.
TN: Okay, great. Now when you talk about industrial metals like copper and you say a lot is needed for batteries, these sorts of things, that’s a more medium, longer term term opportunity. Is that right?
TS: Absolutely. When you’re talking about things, I mean, we’re already seeing the nickel market, cobalt market, lithium market, aluminum markets all hitting new highs. Copper’s kind of waffling about. But that’s kind of more a marathon trade rather than a sprint trade, in my opinion. So I think we’re going to see more and more demand for that further out in the market. So it’s kind of a longer term investment.
TN: Okay, great. And then what about industrial metals demand in China? As we switch to talk about a China topic, are we seeing industrial metals demand rise in China, or is it still kind of stumbling along and it’s recovery.
TS: That is still kind of stumbling along. And so what I have said before try to emphasize is that I think a lot of these battery metals in particular demand is going to go going to be outside of China.
China won’t be the main driver of this demand anymore as the west policies want to change to EVs and greener technology. So I think you’re going to start seeing very much increased demand for the west. So China demand might not be as significant anymore in that particular area.
TN: Okay. So that’s interesting. You mentioned China demand, Dink and Albert, I’m interested in your view on that. We had the Fed come out last week and talk about tightening and reinforced some of that this week. What dynamic is necessary in China, if anything, for the Fed to start tightening?
AM: Well, I think first of all, Tony, China is going to have to stimulate. They’re starting to prioritize growth for the first time in a long time. They see the US in a bit in a little bit of trouble here with the Fed making policy errors. I don’t want to say heirs. We’re more about like throwing together against the wall and see what works. Right.
So China is trying to be the seesaw for the world’s finance sector. Money comes into the United States it goes out. Where is it going to go? It’s either Europe or China. Europe right now is a complete mess. So obviously you see that money going into China you will keep on leaning on businesses and look to control more than you should but they’re breaking up a lot of the old power structures and that’s actually bullish long term for China. We can debate many of these episodes that we’re doing now, Tony, about whether it’s a good or bad thing for the China power structure. But that’s for another day.
TN: Right. What kind of stimulus if we look at things like loan demand so we’ll put up that chart on loan demand. Can you talk us through can you talk us through the chart of what it means and what the PPO will likely do as a result of low demand or consumer credit? Sorry.
NG: Yeah, the credit impulse so that’s private sector lending as a percentage of GDP and that chart shows it may have based and that looks like what we’ve been hearing is that the PBOC has been encouraging the private sector to start extending credit into the system, particularly to find off the real estate market which is not a surprise.
My personal view and some of the people that I talked to on China is that’s just filling a hole. This is plugging holes or putting plasters on various holes. So what will be interesting is to see how that progresses further down the line along this year. I don’t think nothing’s going to happen before February 1, lunar new year and then you’re running into that plenum. Do they encourage that you’ve got the Olympics and then you’ve got the plenum? Do they encourage some sort of boost?
I don’t think there’s going to be much fiscal. I think there’s a reason for that. I think there’s a connection with the real estate sector. Real estate sector. As a source of great funding for the local governments.
TN: They spend fiscal on bailing out real estate already. Why would…
NG: You have to provide fiscal to the local governments just for the services?
TN: Right. So the central party meetings are in November, so there’s plenty of time between Lunar New Year and November to really tick off some monetary stimulus and get some feel good factor in, say, Q three or something. Is that what you’re thinking?
NG: There is a desire, as Albert rightly said, they are talking about the economy now, but it just feels like it’s one plug the bad, the big holes that have been appearing and they just keep appearing and now we’ve got Shamal. It just seems like it’s step by step plug every hole and then give a little bit of access to try and get the private credit rolling again.
AM: Tony, everybody is looking for a flood. When is the flood of liquidity going to come into China? Right. But that’s not going to happen until May or June until they see what the US Fed is going to do because nobody right now knows what the Fed is going to do.
Inflation is obviously a problem within China, specifically oil and other commodities, as Tracy was talking about. Their eyes are completely on the Fed. China will have to pop services sector as a real economy. It’s kind of a shambles there due to commodity prices and inflation.
The willingness is there to lend. There’s no question about that. But who wants property right now in China? They can force feed the economy via credit. But that’s inflationary also. So there’s another do move here within China. How do they boost their economy but still keep inflation down? Same thing the United States is going through. Okay.
TN: So let me give you a really simple trick here.
NG: Let’s not forget you’re seeing some majors. Shanghai now has Omikaron. Remember, China, supposedly, according to the World Health Organization, didn’t suffer the first route, but you got Dahlin is closed, Nimboa’s got problems now Shanghai, Shenzhen, and they’re worried it’s going to head up towards Beijing.
All these international flights to Hong Kong completely canceled. So that’s another problem if you extrapolate and equate it to what’s happened in the west whenever these outbreaks have occurred.
TN: Yeah, but I think the solution. Yeah, that’s a problem. I think everybody’s facing that and I think China is just very, very sensitive about that. We can come up with whatever kind of conspiracy theories we want about China, but I just really think that they’re very embarrassed by COVID and they’re trying to cover things up, not cover up, but they’re trying to offset the negative preconceptions globally by taking dramatic action at home. That’s my view.
TS: And they have Chinese New Year and the Olympics coming up, right?
TN: Yeah. And they’re being very careful about that now. My view for quite some time has been that they would keep the CNY strong until after Lunar New Year and after Lunar New Year, they could get some easy economic gains by weakening CNY just a bit. Is that fair?
AM: I think it’s fair. They don’t want the bottom to fall out of the economy. And the extent of their damage the extent of damage to the economy was pretty significant. So they’re going to have to pull off a few tricks. Like you said.
TN: It’s percentage wise, it’s a lot. But in reality, at 65667 CNY historically, it’s nothing compared to where that currency has been historically. And I think it’s pretty easy to devalue to that level. And I think they would get some real economic gain from that.
AM: Yeah. But again, it matters what the Feds are going to do with rate hikes. That’s the wild card.
NG: The devaluation not just look at the dollar, look at the CFA, because I think it pays them to value against the Euro more than the dollar.
TN: Yeah. Okay. We can have a long talk about the CFO’s basket at some point.
NG: My point is you got to look at the Euro CNY as well as the US, because I think that’s where they’ll go.
TN: Yeah. Okay. So does this present an opportunity for Chinese equities in the near term, or is it pushed off until Q two?
AM: I mean, from my perspective, I’ve been on Twitter saying that I’ve gotten into Chinese equities. They are de facto put on the US market, in my opinion. They don’t have the strength of the actual but does. But money has got to flow somewhere, and if it’s not going to the United States. It’s going to go to China.
TN: Okay. All right. Let’s move on to bonds. Okay. Nick, can you cover bonds and tell us are we on track? Are things happening as you expected? Do markets do bonds like what the Fed has been saying? What’s happening there?
NG: Well, the initial reaction after the testimony from Powell was you had a steadying and a slight rally in bond prices, slightly slower yields. But I thought today was fascinating because today we’ve across the York Cove. We’ve made new highs for the move, so we’re at the highest yield for the last year.
What was interesting is we had that disappointing retail sales. Okay. That would typically suggest if this Fed is sensitive on the economy, perhaps they won’t do much. Well, the bond market didn’t like that. So now you have what is typically good news for the bond market, creating a sell off. And that tells me that the bond market is beginning, especially with the yield curve. Stevening, the bond market is beginning to express more anything that suggests that the Fed doesn’t do what they’re talking about. The market wants to see action. Not words.
TN: We’re getting punished for now.
NG: And what’s interesting is if you think a little bit further forward, if the Fed does hold back and isn’t as aggressive as some of the governors have been suggesting, three to four hikes I didn’t think Ms. Bond Mark is going to like that.
TN: Or Jamie Diamond saying eleven heights.
AM: Jamie diamond is nothing that comes out of his mouth should be taken at face value. Him knocking the 30 year bonds down today, he’s just setting himself up to buy. I mean, the guys he talks his book always has.
TN: Hey, before we move on, before we move on to talking about next week, we did get a question from Twitter from @garyhaubold “Does the FOMC raise rates at the March meeting? And how much does the S&P500 have to decline before they employ the Powell put and walk back their lofty tapering and tightening goals” in 20 seconds or less going, Albert? Oh, 20 seconds or less.
AM: Well, the market needs to get down to at least the 4400, if not the 43 hundreds. That’s got to be done in a violent manner. And it has to put pressure on Congress to do it. And they can’t raise rates unless they get at least $2 trillion in stimulus.
NG: And also don’t forget the Cr expires on February 18. So we could be in the midst of a fiscal cliff.
TN: February 18. Okay. We’ll all be sitting at the edge of our seat waiting for that. Okay. So week ahead, what do you guys think? Albert, what are you seeing next week?
AM: Opec pump for Tuesday and then Biden dump for Wednesday as they set up a build back better push in Congress, along with probably a hybrid stimulus bill to try to get to that $2 trillion Mark. Otherwise, they got no fiscal and this market is going to be in some serious trouble.
TN: Okay. Can they do it? Can they do some sort of BBB hybrid?
AM: Yeah, they can do it. They can get ten Republicans on board as long as there’s a small business, small and medium sized business stimulus program. Okay. They’ll get that.
TN: And if they do market react and you say that’s $2 trillion. You say that’s…
AM: They need a minimum of 2 trillion to be able to even think about raising rates in March.
TN: Okay. And Nick, how does it matter?
AM: This is dependent on how bad inflation actually gets, because if we get an 8% print of inflation next month. Then everything is on the table.
TN: So can you say that you cut out just a little bit if we get what, an 8% print?
AM: If we get an 8% print on CPI the next time around and anything is on the table.
NG: Okay. I think what was happening with the bond market basically is it’s beginning to look a little bit longer term. And I’ve had this conversation, the big traders, the big fund managers are sitting there thinking, okay, look at crude oil now, 85 on Brent. Energy price is crazy in Europe.
That’s going to feed through from the wholesale level all the way through to the consumer via manufacturing goods, via the housing market, via service industries. Starbucks has to charge some more because they’ve got a much bigger overhead.
TN: Netflix just raised their prices by a buck 50 or $2 a month or something.
TS: Filters down to everything. Energy runs the world, right? So that’s going to higher energy prices are going to factor into literally everything you do.
NG: And my personal view, I think that sort of works is in sync with Tracy. I think crude goes a lot higher. I think this year we could see north of 100, perhaps as high as 120. This all feeds through, right? So the point is the bond market there’s a lot of conversations on a longer term plane right now. And the bond market is an expression if it’s higher yields, yield curves deepening.
Anything that says that the fed is hesitant, I think you get sent off. I think that’s why we sold off. We should have been running on week retail sales.
TN: Okay, Nick. Sorry. If we do get a $2 trillion bill, what’s going to happen with bonds?
NG: They’ll be sold.
TN: They’ll be sold. Okay. So they’re going to punish the fed if we get fiscal?
NG: They’ll punish the fiscal fed to start acting and acting in short order. And I remain unconvinced. We’ve only heard words. We got to see the action. They’re still doing. Qe. Right? It’s absurd.
TN: Yes. We’re going to keep the flow going over here, but we’re going to raise interest rates over here. I’m not sure I get it. There’s been that disconnect ever since they announced this in December.
Okay, guys. Thank you very much. We’ve hit our time. Have a great week ahead and we’ll see you next week. Thank you very much.
