The Rhine River has fallen to a critical 40cm mark at a key German waypoint (was 42cm earlier today). Nevertheless, the decline will not halt ship traffic according to sources, but the trend is not good.
If the area becomes unpassable it impacts goods transport including coal and could lead to increased chance of not only higher costs (finding alternative means of transport would be higher) but the chances for a German recession.
Looking at the details, services output declined by 0.4% with the largest negative contribution coming from human health and social work activities, reflecting a reduction in COVID-19 activities. Household consumption declined by 0.2% with a positive contribution from net trade helping to offset things. Overall, Q2 GDP is seen 0.6% above its pre-pandemic levels i.e. Q4 2019.
The pound caught a light spike on the data from 1.2190 to 1.2215 upon release as the figures were better than anticipated but it still points to a contraction in the UK economy in Q2. I don’t see that as being much comfort as it just pushes the recession narrative one step closer than the BOE forecast of early next year.
Goldman Sachs view of much higher prices is based on:
demand exceeding what is currently expected
supply staying low, inventories falling
and markets not positioned for a rising price
he only rational explanation in our view is destocking as commodity consumers deplete inventories at higher prices, believing they can restock once a broad softening creates excess supply. Yet should this prove incorrect and excess supply does not materialize as we expect, the restocking scramble would exacerbate scarcity, pushing prices substantially higher this autumn potentially forcing central banks to generate a more protracted contraction to balance commodity markets.
Instead, markets appear to be pricing a soft landing outcome: minimal further increases in interest rates dissipating inflation and sufficient economic growth to keep earnings well-supported into 2023.
In our view, macro markets are pricing an unsustainable contradiction – it is difficult to square a softening FCI, a more accommodative Fed pivot, falling inflation expectations and drawing commodity inventories.
Reuters have collated a couple of analyst comments on the mixed messaging. The lack of clarity looks to have locked in price volatility for now:
“There’s a great deal of uncertainty about demand in the short run. Until that settles, it (the market) will be like this for a while,” said Justin Smirk, a senior economist at Westpac.
“The net picture that the IEA painted was a mix,” said Commonwealth Bank analyst Vivek Dhar. “Russian supply has been more resilient than thought.” “Assessing global oil balances by the end of the year right now, given what’s happening on the demand side versus what’s happening on supply side – it’s just complicated. That’s why you have the daily volatility.”