Commodities & Energy Sector
The growing threat of fiscal dominance; lower real interest rates; a weaker USD; increasing aggregate demand in Asia spurred by Chinese stimulus; safe-have demand driven by growing war risk all are bullish for gold. We are lifting our price target to $2,000/oz by year-end (from $1,900/oz) and upgrading our recommendation to a strategic holding.
In Section I, we explain why we do not see the deceleration in US inflation, the likely near-term pickup in European growth, and the end of China’s dynamic zero-COVID policy as signs of a sustainable rebound in global economic activity over the coming 6-12 months. The key question is not whether inflation will fall back to central bank targets, but rather how quickly this will occur. For now, our indicators point to slower but still elevated inflation this year. In Section II, we explore what it will take for the Fed to cut interest rates, and note that nonrecessionary rate cuts are possible but not especially likely.
Heading into a black hole, you pass a point of no return known as the ‘event horizon’ after which your impending oblivion is sealed. US recessions also have an event horizon, which we are fast approaching. We reveal a leading indicator of this event horizon, and what it means for investment strategy.
China’s re-opening – powered by the fiscal and monetary stimulus required to achieve at least 5% real GDP growth after flattish 2022 growth – and a weaker USD will catalyze demand growth this year and next, lifting global oil consumption by close to 2mm and 1.7mm b/d in 2023 and 2024. We lowered our Brent forecast slightly for this year to $110/bbl, and expect 2024 prices to average $115/bbl. WTI will trade $4-$6/bbl lower.
China's reopening is much more positive for the Chinese economy than it is for the rest of the world, as it will boost its domestic service sector activity and consumer spending much more than the industrial economy. A slowdown in Chinese industrial activity will put downward pressure on its demand for raw materials and energy, helping the world avoid another spike in inflation. Upgrade Macau casinos to overweight as the key beneficiaries of reopening. Off-shore TMT and bank shares face structural headwinds.
In response to lower energy prices and China’s reopening, European assets prices are outperforming. Will the ECB spoil the party?
CCP policy stimulus will boost growth in China this year. Copper prices breached $4.00/lb on COMEX this week, as expected. We continue to forecast $4.50/lb this year, with upside price risk dominating. Iron ore also will rise, but economic and regulatory policy uncertainty clouds the outlook. We remain long the COMT and XME ETFs. We are getting tactically long BRL/USD and AUS/USD on the back of our metals view, which is constrained by China’s reversion to absolute autocracy and ability to reverse policy suddenly and unpredictably.
The crucial question for 2023 is: will the US and UK Beveridge Curves shift back inwards to their pre-pandemic versions, ushering in a soft landing? Or, will we slide down the new post-pandemic Beveridge Curves into recession? Plus: we reveal the most important chart for Europe and the most important chart for China in early 2023.