Good morning. By reading the weekend papers and research roundups, it’s clear that we’ve crossed the Rubicon of market sentiment. For months, everyone has been talking about inflation. Recession is everyone’s first word right now. We follow the trends below to look at funding chaos in commodity markets. Email us: [email protected] and [email protected].

Recession Whispers, Part 2

Friday’s letter noted that low unemployment like ours now looks like a lagging economic indicator that could persist into the cusp of a recession.In response, Larry Summers sent a Paper Backing the idea, he published it this month with Harvard’s Alex Domash. The argument goes like this:

• The labor market is now even hotter than supply-side indicators such as unemployment and prime-age employment suggest. Demand-side measures such as job openings and resignation rates per unemployed person indicate extreme strain: “We estimate that the unemployment rate, consistent with current levels of job openings and worker resignations, is below 2%.” For example, here’s a breakdown of each unemployed person Job vacancies chart:

• History suggests that this tightness in the labor market means wage growth (currently at 6.5%) is likely to pick up further in the coming months, bringing with it headline inflation.

• When wage inflation and employment approach current levels, if only The way monetary policy can control inflation is by tightening enough to trigger a recession, as shown in the table below:

  

• In all of the recent “soft landings” of the Fed’s design, the labor market has been far more accommodative, as follows:

  

some economists have technology opposing view For example, job vacancies data indicate that the way jobs are listed has changed considerably over time. I’ll ask a broader question. While I’m impressed with the way Domash and Summers put together the historical evidence, I think if anything could have been different, it might have been this time. The pandemic and the government’s response make this cycle different from others. A recession seems likely to me, but it doesn’t surprise me at this point.

Speaking of which: While many indicators point to a fiery economy and strained supply chains, U.S. domestic shipping is cooling off abruptly and meaningfully.

In a striking study, Bank of America transportation analyst Ken Hoexter downgraded a slew of freight, rail and express companies in response to lower demand and weaker pricing. In the bank’s recent survey of trucking companies, “a significant number of respondents commented that prices are falling rapidly and capacity is available, and these shifts could herald an economic downturn and lower demand.” Truck rates per mile are falling rapidly, as seen here The dark blue line shows:

Shipping industry leaders have noticed a shift:

We recently hosted two UPS [package delivery] and XPO [trucking] Management noted some easing in the labor market. In our most recent call with Judah Levine, [head of research at global freight booking platform Freightos], he pointed out that inflation is starting to affect consumer demand.Bank of America yesterday Container Shipping Outlook CallHuazhutan [ocean shipping consultancy] Linerlytica highlighted that container demand is softening (more than seasonality and a new wave of lockdowns in China), port congestion has passed its peak (much less of a problem compared to weak export demand), and effective capacity is increasing as bottlenecks ease, adding to the downside pressure rate pressure

That’s not to say the global transport market fell off a cliff in March. As Oxford Economics’ Oren Klachkin puts it: “Traffic pressure increased in March . . . shipping costs rose and air cargo volumes increased this month. Queues are reduced,” the most important port for Asian manufactured goods into the United States. chart:

Perhaps this is all unsurprising given that wholesale inventories in the U.S. have returned to even above pre-pandemic trend levels:

In short, the shift in shipping sentiment may be the first sign of what “transient” inflation doves have long promised: inflation that popped up last fall could be just as fast as supply chains normalize and excesses subside. The fiscal stimulus to recede the pandemic recedes rapidly. Will demand decrease on its own after a single rate hike? If so, the Fed may be able to back off before the recession begins.

Or, the recent shipping data could be a blip in a turbulent industry. Or, no matter what the Fed does, it’s too late to avoid a recession. Follow this space.

Commodity financing crisis is about real assets

A month ago, it was not crazy to worry that Western sanctions on Russia could trigger a financial crisis.western bank $100 billion Exposure to Russia could spread losses globally and put post-crisis banking rules to the test. Fortunately, it didn’t happen.The most closely watched bank financing risk indicators Soaring in early Marchbut it fell quickly as everyone realized that Ukraine would not trigger a 2008-style implosion:

A big financial explosion—like the banks in 2008 or the U.S. Treasury bond in 2020—is not the story of this crisis. Instead, it’s all about commodities.This time, something went wrong Physical assets is spreading to financial markets, not the other way around.

The action was most evident in the energy market, where prices had risen before Russia supercharged it. Under normal circumstances, oil drillers use derivatives — usually swaps or futures contracts — to hedge. The idea is to short future oil prices and lock in profits. If prices go up, now your oil is worth more. If the price falls, your short position will be more valuable. Either outcome is acceptable if you hedge wisely. Other types of energy companies, such as utilities, may make the opposite bet to lock in prices—that is, long oil prices to guarantee stable input costs.

But the commodity-hedging system is under pressure as oil volatility increases.Some Report Indicates a 25% or more increase in hedging costs. Margin requirements for existing hedges continue to increase.Shell admitted on Thursday that it had been forced to move billions of dollars in cash holdings, $3 billion estimate, to fund its margin requirements. Market indicators also suggest that liquidity is dwindling. The number of active Brent futures contracts has fallen sharply since March:

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Oil traders have been excited for weeks Seek government help. On Friday, they got something. From the Financial Times Martin Arnold:

The German government has announced an aid package to support companies affected by the war in Ukraine. . .

The measures include a new 100 billion euro short-term loan scheme from the state-owned KfW Development Bank to provide energy companies struggling to meet significantly increased insurance costs…

“We will alleviate difficulties and prevent structural fractures,” said [finance minister Christian] Lindner added that the plan is “precisely positioned” to avoid hindering the transition from fossil fuels.

Something similar to this German “shock absorber” package is being rolled out France and also.CFTC so far fade Any need for it to respond, but in echoes of post-2008 financial politics, militant groups have harsh It promised to “clearly reject any bailout for commodity traders”.

However, viewing it as a financial crisis in commodities may miss the point. Goods are very expensive, which hurts the people who use them. Fixing the financing problem won’t make the situation any less serious. (Wu Yisen)

a good book

Janan Ganesh against mental chatter.