Comment of the Day
2nd February 2023
Eoin Treacy
Feb 3
Video commentary for February 2nd 2023
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: tech stocks surge following Meta earnings but Amazon and Alphabet disappoint in after hours, dollar strengthens on ECB and BoE close to rate peaks, gold downside key reversal, oil eases, Australia's ASX overbought as it tests its peak.
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Is this time different?
In watching to Jerome Powell’s press conference yesterday I was struck by the number of times he said this is not a normal business cycle.
The inflation that we originally got was very much a collision between very strong demand and hard supply constraints, not something that you really have seen in prior, you know, in business cycles.
And
I think it's -- because this is not like the other business cycles in so many ways. It may well be that as -- that it will take more slowing than we expect, than I expect to get inflation down to 2 percent.
And
this is not a standard business cycle where you can look at the last 10 times there was a global pandemic and we shut the economy down, and Congress did what it did and we did what we did.
Eoin Treacy's view
There is some logic to that statement. We have never shut down the entire global economy or printed so much money in such a short period of time. The clear conclusion Powell is taking in predicting a soft landing is that inflation really is transitory.
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ECB Hikes by Half-Point and Signals Same Again in March
This article from Bloomberg may be of interest to subscribers. Here is a section:
The European Central Bank lifted interest rates by a half-point, with President Christine Lagarde saying another such move is almost certain next month, despite conceding that the inflation outlook is improving.
Policymakers, as expected, raised the deposit rate to 2.5%, the highest since 2008. Lagarde warned that the most aggressive bout of monetary tightening in ECB history isn’t done — even as energy prices plunge and the Federal Reserve moderates the pace of its own hikes.
In a statement, the Governing Council said it “intends” to raise rates by another 50 basis points at its March meeting, then “evaluate the subsequent path of its monetary policy.”
Eoin Treacy's view
The ECB may hike again at the next meeting but clear implication is the peak of the hiking cycle will be lower than the USA’s. The same is true for the Bank of England. The vast sums spent to avoid an energy crisis mean governments will be under pressure to contain costs in future. That will siphon money from speculative activities and help to contain demand driven inflationary pressures.
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Oil's Pipe Dream
This article for Javier Blas for Bloomberg may be of interest. Here it is full:
For years, energy experts modeling the impact of 2050 net zero targets on oil demand had the advantage that the deadline, and the incremental steps to getting there, were a long way off. If time proved their scenarios wrong, they’d be long forgotten anyway.
But now, those first intermediate waymarks are around the corner, and they look increasingly farfetched.
Earlier this week, BP PLC (LSE:BP.) published its annual Energy Outlook, presenting three scenarios — not forecasts — for how oil demand may evolve. The Net Zero path, broadly in line with the goals of the Paris Agreement, is difficult to reconcile with current trends.
In such a narrative, BP’s model shows global oil consumption collapsing to 21 million barrels a day by midcentury, down from about 98 million today.
Ignore 2050 and focus instead on the intervening milestones, starting with 2025. In just two years’ time, BP’s Net Zero scenario sees oil demand 4 million barrels a day lower than it is now. That would mean removing the equivalent of Germany’s entire consumption in 2024 and repeating that feat again the following year.
Every oil forecast I’ve seen shows demand rising in 2023, and the few 2024 projections already published — including one from the US government — see growth continuing.
Looking further ahead, BP’s Net Zero readout suggests demand would need to plunge a further 9 million barrels a day from 2026 to 2030, falling to 85 million a day by the end of the decade. That equates to eliminating the consumption of France each year and, on the final year, striking out Italy as well.
Then the really difficult period starts. The scenario sees the world using just 70 million barrels a day in 2035, requiring the annual removal of 3 million a day. That equals the demand of Japan, currently the world’s fourth-largest consumer.
Net zero models look increasingly at odds with short-term trends. It’s possible oil demand can sink by 2050, but is it going to plummet in a matter of months and keep falling precipitously every year for the next decade? No.
Eoin Treacy's view
Politicians talk a good game on containing carbon emissions, but have no real solution for how to avoid massive cuts to living standards in achieving them. Environmentalists have been inveighing against the evils of coal for decades but global consumption continues to hit new highs. Is there any reason to expect oil to be any different? That suggests demand will migrate to less well off countries where the reality of survival trumps environmental concerns.
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Eoin's personal portfolio: profit taken on precious metal trading position:
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.