EC What's Next?

10 and one 10 us dollar bill

Image Source: Unsplash

As Q3 winds down and Q4 begins, the broad investment climate is being shaped by the turning of the monetary cycle. Norway was the first, and New Zealand will be next. It is not so much that these moves will force others to do the same. Instead, the Norges Bank and the RBNZ are simply ahead of the others.

Although there is speculation that the Bank of England can move before the end of the year, it seems like a stretch. The market feels increasingly confident that the Bank of Canada will raise rates around the middle of 2022. By our calculations, looking at the Fed funds futures, the market has priced in a hike for the September 2022 FOMC meeting and has discounted a little more than a 25% chance of a second hike. The offs may rise toward 50% before finding a new equilibrium.

The European Central Bank, the Bank of Japan, and the Swiss National Bank are notable laggards. However, the ECB's Pandemic Emergency Purchase Program will wind down and finish at the end of Q1 22. It will, however, continue to buy bonds under the less flexible Asset Purchase Program (~20 billion euros a month). The Bank of Japan has reduced its bond and stock buying with little fanfare and even less impact, which reinforces our argument about the significance of the signaling channel in the efficacy of QE. 

The Evergrande problems, which have been evolving for a few months at least, play on anxiety about the debt problem in China, which extends beyond property developers. It may cast a shadow over the investment climate, even though direct foreign exposure appears limited.

The Chinese government moved to ensure that funds are used to construct what was promised and paid for rather than servicing creditors. Comparisons with Lehman and the Great Financial Crisis, or even Long-Term Capital, seem misplaced. Maybe a more apt comparison, if one is needed, may be the bankruptcy of GM and Chrysler in 2009, with contained adverse impact.

The jump in energy prices is another dimension to the business and investment climate. Oil, natural gas, and the cost of carbon offsets have appreciated markedly. Brent began the year near $50, has not traded below $70 this month, and set new three-year highs before the week at around $78.25.

The price of WTI has doubled since the end of last October. That oil prices doubled before the previous three business downturns in the US before the pandemic illustrates its power as a headwind even in a primarily service economy. 

Simply put, the oil demand has rebounded quicker than the supply. OPEC+ will gradually add 1.2 million barrels a day in Q4, though US shale is slower to recover, and there was the loss of output and refining capacity due to storms recently. It is slowly returning. Russia has reduced gas supplies to Europe, apparently to pressure the early start to the Nord Stream 2 pipeline while it is also rebuilding its inventories. China reportedly is also revamping its stocks.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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