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Good morning. Job openings fell more than expected in July, and lay-offs increased slightly. Meanwhile, discount retailer Dollar Tree fell by a fifth yesterday (ouch) after missing analysts’ expectations and following its peer Dollar General in cutting its outlook. The Fed did not really need more reasons to move later this month, but it has just been given two. Let’s hope there aren’t too many more. Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.
The upside of commodities being down
Commodity prices are falling across the board. Here are oil, iron ore and copper:
The simplest, and probably the best, explanation of the simultaneous decline is that global demand is soft. The US economy is still growing at a respectable pace, probably north of 2 per cent in real terms. But GDP growth in the Euro area rose at just 0.6 per cent annually in the past quarter, and China’s economy, while a little tricky to read, is probably expanding at less than 5 per cent — poor by its standards. And China’s commodity-hungry real estate sector is still stalled. So there is suddenly lots of (for example) iron ore around, and not much need for it. Panmure Liberum’s Tom Price sums up:
After years of price-buoying disruptions [the] mining-majors are finally delivering an unmitigated, record-high, collective flow of ore to their principal customer, China. Problem is, China’s need for ore — and the steel generated from it — is faltering. What’s happening over there? Growth in China’s property sector, which takes about 40 per cent of its total steel supply, is collapsing. Already down 30-40 per cent year to date, is there any upside for ore prices? Not yet.
Oil fell below $75 per barrel this week, and Kieran Tompkins at Capital Economics thinks China’s slowdown is again the main reason: “Looking at China’s own oil production and their net imports of oil products, it’s clear that China’s oil demand has peaked,” he says. European oil demand has been declining for decades, and US demand is essentially flat, though there was a slight downward reduction in June’s numbers:
As ever, there are some geopolitical events at play in oil, too. The Opec+ countries continue to squabble over production cuts, and Libya just brought 230,000 barrels of oil per day back on to the market after weeks of internal conflict. But demand seems to be playing the bigger role.
The same goes for other commodities markets. As we said when we wrote about copper recently, the demand catalyst that many metal bulls had been counting on — the green energy transition — is taking longer to arrive than expected, so the China demand slump hurts (“The copper rally is delayed,” Goldman Sachs analysts said rather diplomatically, as they undiplomatically cut their 2025 price forecast for the metal by a third this week).
Demand may improve in the coming months, but only marginally. The end of the global rate-rising cycle may help commodities demand. China could add infrastructure stimulus. In July, the IMF upgraded its global growth outlook for 2025 by 0.1 per cent — driven in part by an upgrade in China’s outlook — and, just yesterday, the Atlanta Fed upgraded its US growth estimate for Q3 by the same amount.
It would be good if global growth were higher, and it would be good if the green transition were transitioning more quickly. But there is an upside here. Falling commodity prices make it less likely that, as the Fed eases policy, inflation will reignite. A soft landing takes a lot of luck, but circumstances seem to be co-operating.
(Armstrong and Reiter)
Turkey’s strange equity rally
Turkish stocks have had a remarkable run over the past few years. In dollar terms, the Borsa Istanbul 100 index has performed well — including a two-month period in 2022 in which it doubled.
It has now outperformed emerging markets indices for the past half decade:
Its recent drop has been precipitous, though. Last week, the index was down 13 per cent from its late July peak. The story of both the rally and the correction are remarkable.
From 2020-22, Turkey experienced record inflation. Prime Minister Recep Tayyip Erdoğan was determined to keep interest rates low to keep voters sweet, despite strong domestic demand and import cost pressures. Inflation hit 90 per cent in late 2022. Turkish households, traditionally high savers, started to pile into the equity market as a hedge, fuelling a market surge.
In 2023, after securing another term, Erdoğan reversed course and instructed the Turkish central bank to start raising interest rates — from just 8.5 per cent in June to 50 per cent in January of 2024. He also reappointed internationally respected former finance minister Mehmet Şimşek, who handled Turkey’s recovery from the 2009 financial crisis, and promised to tackle Turkey’s large account imbalances. Foreign investors piled in.
The surprising combination of Turkish households hedging with equities and foreign investors betting on more orthodox monetary policy proved potent. But strange bedfellows are often doomed to part. Recently, higher interest rates have made deposit rates as high as 50 per cent an appealing alternative to stocks for Turkish households. There has been an outflow of foreign investors in the last three months, too:
Foreign investors may be leery of the economic outlook, given that inflation remains high and further fiscal or monetary tightening may be required. There is also some speculation that Erdoğan might sack Şimşek. Emre Akcakmak of East Capital notes that reporting changes at Turkish companies could be a factor: “Turkish companies [are just now starting to] release earnings reports that use inflationary accounting, which is creating confusion for local and foreign investors.”
Some investors are still bullish, though. From Simon Quijano-Evans at Gemcorp:
Household inflation expectations are still high . . . [but] the central bank and Simsek are doing a tremendous job. If expectations can be restrained, and given oil prices are seeing downside pressure, all these things should combine to provide for a virtuous cycle. At the end of the day, this will be good for all sorts of Turkish assets.
(Reiter)
One good read
The economics of a three-peat.
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