The goods and the soft landing

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Good morning. Job openings fell more than expected in July and layoffs rose slightly. Meanwhile, discount retailer Dollar Tree fell by a fifth yesterday (yyyy) after missing analysts’ expectations and following peer Dollar General in cutting its outlook. The Fed didn’t need more reasons to move later this month, but it just got two. Let’s hope it’s not too many. Email us: [email protected] and [email protected].

The positive side of commodities being declining

Commodity prices are falling everywhere. Here are the oil, iron ore and copper:

The simplest, and probably the best, explanation for the simultaneous decline is that global demand is weak. The US economy is still growing at a respectable pace, probably north of 2% in real terms. But GDP growth in the euro area rose by just 0.6% annually in the last quarter, and China’s economy, while a bit difficult to read, is probably expanding by less than 5% – weak by its standards. And China’s commodity-hungry real estate sector is still stuck. So suddenly there’s a lot of (say) iron ore around and not much need for it. Tom Price of Panmure Liberum summarizes:

After years of price-boosting disruptions, major miners are finally delivering a record collective flow of undiluted ore to their main customer, China. The problem is that China’s need for ore — and the steel generated from it — is waning. What’s going on there? Growth in China’s real estate sector, which takes up about 40% of total steel supply, is collapsing. Already down 30-40% year to date, is there any upside for ore prices? Not yet.

Oil fell below $75 a barrel this week, and Capital Economics’ Kieran Tompkins believes China’s slowdown is again the main reason: “Looking at China’s own oil production and their net imports of petroleum products, it is clear that China’s oil demand has peaked,” he. say. European oil demand has been falling for decades, and US demand is virtually flat, although there was a slight dip in the June figures:

As always, there are also some geopolitical events at play in oil as well. OPEC+ countries continue to squabble over production cuts, and Libya just brought 230,000 barrels of oil a day to market after weeks of internal conflict. But demand seems to play the bigger role.

The same is true for other commodity markets. As I said when I wrote about copper recently, the demand catalyst that many bulls in the metal were counting on — the transition to green energy — is taking longer than expected, so the slowdown in Chinese demand is hurting (“Copper Rally Delayed,” Analysts Goldman Sachs said quite diplomatically, as they undiplomatically cut their 2025 metal price forecast by a third this week).

Demand may improve in the coming months, but only marginally. The end of the global rate hike cycle could help commodity demand. China could add an infrastructure boost. In July, the IMF upgraded its global growth forecast for 2025 by 0.1% – driven in part by an improved outlook for China – and just yesterday the Atlanta Fed upgraded its US growth estimate for Q3 with the same amount.

It would be good if global growth were higher, and it would be good if the green transition went faster. But there is an advantage here. Falling commodity prices make it less likely that, as the Fed eases policy, inflation will reignite. A soft landing requires a lot of luck, but circumstances seem to cooperate.

(Armstrong and Reiter)

Turkey’s foreign equity rally

Turkish stocks have had a remarkable performance in recent years. In dollar terms, the Borsa Istanbul 100 index performed well, including a two-month period in 2022 where it doubled.

It has now outperformed emerging market indices over the past half decade:

Its recent decline has been sharp, however. Last week, the index fell 13% from its peak in late July. The story of both the rally and the correction are remarkable.

In 2020-22, Turkey experienced record inflation. Prime Minister Recep Tayyip Erdoğan has been determined to keep interest rates low to keep voters sympathetic, despite strong domestic demand and pressure on import costs. Inflation reached 90% at the end of 2022. Turkish households, traditionally high savers, began piling into the stock market as a hedge, fueling a market rally.

In 2023, after securing another term, Erdoğan reversed course and ordered the Turkish central bank to start raising interest rates – from just 8.5% in June to 50% in January 2024. Also at appointed the internationally respected former finance minister, Mehmet Şimşek. which handled Turkey’s recovery from the 2009 financial crisis and promised to address Turkey’s large account imbalances. Foreign investors flocked.

The surprising combination of Turkish households hedging on stocks and foreign investors betting on more orthodox monetary policy proved strong. But strange bedfellows are often destined to part. Recently, higher interest rates have made deposit rates of up to 50% an attractive alternative to shares for Turkish households. There has also been an outflow of foreign investors in the past three months:

Foreign investors may be leery of the economic outlook, given that inflation remains high and further fiscal or monetary tightening may be needed. There is also some speculation that Erdoğan may fire Şimşek. East Capital’s Emre Akcakmak 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 creates confusion for local and foreign investors.”

Some investors are still optimistic, however. From Simon Quijano-Evans of Gemcorp:

Household inflation expectations are still high. . . (but) the central bank and Simsek are doing a tremendous job. If expectations can hold, and with oil prices under pressure, all of these things should combine to create a virtuous cycle. At the end of the day, this will be good for all kinds of Turkish assets.

(Reiter)

A good read

The economy of a three-peat.

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