Macro Monthly: PPI “resurgence” three risk points

2022-07-21 0 By

A continuation of the bull market will be the biggest risk to PPI in 2022.The steeper year-on-year decline in PPI in January 2022 (from 10.3% to 9.1%) than market expectations seems to confirm the prevailing view that PPI will enter a fast downward path in 2022.However, commodities have had a great start to the year, and our study of commodity excess returns during Fed rate-hiking cycles in our previous report (why Commodities defy Fed Rate Hikes) seems to provide further evidence that this bull market in commodities isn’t over yet.Thus, one of the biggest risks to the consensus PPI forecast for 2022 could be “oil at $100 / BBL and copper at $11,000 / mt”.Oil prices may be skewed by underestimating demand and overestimating supply.On the demand side, with the spread of arcanon epidemic with high infectivity and low severe disease rate and the launch of oral wonder drugs, more and more economies around the world will embrace “coexisting with the epidemic” and relax prevention and control measures. The Lancet even predicts that the global pandemic will end in March 2022.That will mean a marked pick-up in demand for travel, especially on cross-border flights, and a rise in fuel and petrol consumption.In terms of inventories and capacity, the world is ill-prepared to handle this rise in demand.In terms of inventories, global crude oil stocks as of February 2022 are still significantly lower than in the same period of the last five years (2017-2021).Perhaps more notable is the shortage of oil supply capacity, both in OPEC’s excess production capacity and in U.S. shale (DUCs) since the outbreak, which will significantly limit the expansion of oil supply in 2022.The variable is the speed of the Iran nuclear deal. If Iran’s crude oil production capacity returns to the global market, it will gradually ease the imbalance between supply and demand of crude oil.Copper’s pricing may be ignoring the stabilisation of China’s economy.2021 copper price trend and China’s economy appears obvious differentiation, but more consistent with the economic fluctuations of developed countries.One explanation is that the pattern of Chinese demand leading copper prices since 2000 has changed, that China’s influence is waning, and that a post-pandemic recovery in Europe and the United States may lead copper prices at the margin.We have reservations on this view and continue to believe that a policy-supported stabilization of The Chinese economy in 2022 will drive copper prices higher.2021 May be the exception, as the copper content of China’s economy is still high, and probably higher.In 2021 China’s economic momentum is slowing under structural adjustment, whether it’s refined copper consumption is a periodic slump than or copper import growth, but China is still the world’s largest copper consumer, and as the policy of steady growth, moderate advance, both new and old infrastructure or completed real estate firm sales, actively push forward to the support of the postpartum period,Both will drive copper demand higher, as can be seen in the pick-up in copper import growth from the end of 2021.The “hidden danger” of black system may be in capacity constraint.From the Central Economic Work Conference’s emphasis on dual carbon targets, to postponing the carbon peak in the steel industry, and to China’s repeated emphasis on increasing coal supply, the correction of dual energy consumption control in 2022 May further aggravate the already tight capacity pressure in the upstream, especially in the mining industry.It is worth noting that capacity utilization in the coal industry in the fourth quarter of 2021 reached its historical peak since data became available.The risk of a PPI “resurgence” is mainly in the second quarter of 2022.We are expected to see the end of the pandemic in the second quarter, with more and more economies beginning to significantly relax their containment policies, normalizing demand, accelerating economic stabilization in China, and base effects in the second quarter of 2021, putting PPI back above 9%.Fed interest rate hike encountered a rebound in inflation, the difficulty of policy control may rise.When inflation rebound overlay the fed formally enter the cycle wall of monetary policy in our country, the People’s Bank of China for the use of the cutting tools will be more cautious, but it is still possible by expanding liquidity support to relieve the economic pressure, such as increased liquidity delivery and use of structured credit tools, even did not rule out the use of tools.Risk warning: The spread of the epidemic is more than expected, and the effect of policy hedging against economic downturn is less than expected.(Article source: Soochow Securities)