Dissecting The Commodity Bull Phase: It's About To End, Following The Recent Roll-Over Of China "Social Financing" Impulse

Summary

• "China's consumer prices only exhibit mild yet outright deflation; their CPI fell 0.2% year-over-year in February 2021, in what had been the third decline over the past four months"- J.Snider.
• "China is currently running hot in credit terms, which is usually good signal for industrial commodities, but there are signs of Chinese credit growth rolling over into the H2 2021".
• As the first major economy to beat back Covid-19, China is now taking the global lead in moving to unwind its pandemic-driven economic stimulus efforts. There goes the commodity bullmarket.
• The OPEC+ restrain on extra production runs out on April- After that KSA is not constrained anymore to add to productions or ship out supplies. we can almost guarantee that the market will frontrun that event. Besides, oil inventories have ended its current drawdown cycle and will soon build in earnest. The bull phase in crude oil is about to peak as well.
• Simply put, the impact of fiscal and budgetary expenditures in China is being transmitted to the real economy via the Total Social Financing expenditures. This leading indicator has already peaked, has declined sharply, and is about to fall further. This is what happens when you see news article saying that the "credit impulse" of China has rolled over. China LEI will soon roll over; Quasi Money Supply (powering China "shadow banking") shows no sign of bottoming, and M2 Money Supply resume declining soon. As a consequence, the recent global commodity bull phase is just about to roll over.

WEEKEND EXPLORATIONS

freer7Mar 13, 2021 1:07 AM

"Details of the SLR - why many thinks it's a given that the FED will extend it .

But some internal voices disagree and that's why they didn't yet announced the extension.

Could create turbulences in the repo market if I am correct."

Details of the SLR - why many think it's a given that the FED will extend it .

But some internal voices disagree and that's why they didn't yet announced the extension.

Could create turbulence in the repo market if I am correct.

— The Market Dog ™️ (@TheMarketDog) March 12, 2021

freer7Mar 13, 2021 1:20 AM

TGA started drawing down and 10y continues climb. FOMC looking like the pivot. ES is back to being pinned by the Greek dynamics, NQ in a hang. Perhaps the GV rotation has paused in wait of FOMC decision?

freer7Mar 13, 2021 3:49 AM

Stretched but between 61.8-50 fib. Hmm ....RSI is at the highest ever since 1996. For the arty chartists, are we seeing a cup (and handle) in formation? LOL

freer7Mar 13, 2021 4:49 AM

robert.p.balanModeratorLeaderMar 13, 2021 5:30 AM

*For once, I concur with Jeffrey Snider's conclusions. *

"While commodities have clearly boosted the price trend on the production side of everything, though to a much smaller degree here than is being hyped up, China's consumer prices only exhibit mild yet outright deflation; their CPI fell 0.2% year-over-year in February 2021, in what had been the third decline over the past four months."

"The same can be said over here in the United States even as its Bureau of Labor Statistics (BLS) today reports “scorching” producer prices. Always the hype, this “blistering” inflationary base can only be derived from – like China – the narrowest of possible comparisons:"

"Rising 6% year-over-year last month, the commodity PPI index in February gained the most in 111 months dating back all the way to November 2011. This at least seems different (until you realize how 2011’s inflationary flirtation ended)."

"But outside of the commodity contribution (also realizing the supply rather than demand factors behind it), producer prices everywhere else aren’t exhibiting anything unusual. Producer prices for finished goods (final demand) increased by 2.47% year-over-year in February, which is only the highest since January 2020. The core PPI rate (finished goods) rose 2.54% year-over-year, the best since January 2019."

"Nothing different here, either. . . . Given these facts and data, it would follow that US consumer expectations for inflation – like consumer prices themselves – haven’t really moved much."

Our Global Inflation Tour Chock Full of Normal

It really is about abnormality. What I mean by that is, contrary to popular imagination fed by the Fed and other central banks, ever since 2008 the inflation paradigm has changed. The first global financial crisis (GFC1) has proven time and again how it wasn’t a one-off . . .

bogeygolfMar 13, 2021 3:02 PM

what do you make of the small biz survey data?

bogeygolfMar 13, 2021 2:24 PM

China Total Social Financing and Credit Impulse on commodity prices

jayn1321Mar 13, 2021 4:37 PM

I love this chart coupled with the expected yield move down, but my worry is how much they will push this infrastructure bill. A failed bill would likely help this play out

robert.p.balanMar 15, 2021 10:14 AM

jayn1321 -- US infrastructure spending has never meant much with commodities since China's rise in global ranking. It has all been Chinese infra spending. There could be one-off jolt if Mr. Biden's government can ram thru an infra bill. But the blue states already got what they want from the newest COVID-19 stimmy bill, so there is be less urgency to ram thru another pork-barrel a second time.

bogeygolfMar 13, 2021 2:24 PM

bogeygolfMar 13, 2021 2:29 PM

"Whether the crazy commodity cycle can continue to run on fumes into Q2 is another interesting debate. China is currently running hot in credit/m1/m2 terms, which is usually a good signal for industrial commodities, but there are signs of Chinese credit growth rolling over into the second half of 2021. If you pair this with a hawkish balance-sheet move by the Fed, then you may have the perfect cocktail for much weaker risk appetite, but first things first. This is not a story for March/April, but maybe rather for May/June."

RM13Mar 13, 2021 9:40 PM

The obvious transition time would be sometimes in June/July, especially for oil..

robert.p.balanMar 15, 2021 10:18 AM

The OPEC+ restrain on extra production runs out on April- After that KSA is not constrained anymore to add to productions or ship out supplies. I can guarantee that the market will frontrun that event. Besides, oil inventories have ended its current drawdown cycle and will soon build in earnest.

bogeygolfMar 13, 2021 2:29 PM

I think this would be an interesting debate for the group to have.This is from the Nordea link that gwizz1 shared earlier: e-Markets

corporate.nordea.com

freer7Mar 13, 2021 3:07 PM

Thanks Robert and Bogey for the info!

Robert, what do you think of Nordea's call on huge infl surprise in Q2 based on NFIB data (6m lead) aided further by Biden's stimmy chq directly into consumers and SMEs, which is inflationary? TIA

ikswo123Mar 13, 2021 6:58 PM

This is an inflation sample size of 2, chlorine is definitely impacted by the pandemic (think disinfectants): pool chlorine I paid 79.99 for last year I just ordered for 99.99. Pool shock 12 pack 39.99 to 64.99. Makes copper seem like a bargain. Economy wise the lever should be the velocity of money. If people hoard the stimulus, inflation will be minimized. If demand spikes, inflation will rise.

RM13Mar 13, 2021 9:39 PM

Simulus checks hitting bank accounts today, cryptos up.. BTC up 8.2%, ETH up 10.4% at this moment..

First Batch of $1,400 Stimulus Checks Hit Bank Accounts Starting Today

Additional groups of direct deposits are expected to be sent over the next few weeks.

"Whether the crazy commodity cycle can continue to run on fumes into Q2 is another interesting debate. China is currently running hot in credit/m1/m2 terms, which is usually a good signal for industrial commodities, but there are signs of Chinese credit growth rolling over into the second half of 2021. If you pair this with a hawkish balance-sheet move by the Fed, then you may have the perfect cocktail for much weaker risk appetite, but first things first. This is not a story for March/April, but maybe rather for May/June."

The obvious transition time would be sometimes in June/July, especially for oil..

Albert.FoodMar 14, 2021 2:14 AM

What is the best way to hedge a portfolio with commodity heavy exposure? Long DXY?

robert.p.balanModeratorLeaderMar 14, 2021 1:11 PM

US infrastructure spending has never meant much with commodities since China's rise in global ranking. It has all been Chinese infrastructure spending. There could be one-off jolt if Mr. Biden's government can ram thru an infra bill. But the blue states already got what they want from the newest COVID-19 stimmy bill, so there is be less urgency to ram thru another pork-barrel a second time.

robert.p.balanModeratorLeaderMar 14, 2021 1:11 PM

For the commodity universe, there is nothing more important than the credit flows in China's domestic economy. Those credit flows are well telegraphed -- those flows are discussed in the five-year plans that are formulated and remodified during the December, year end, plenary meetings of the Communist Party Of China (CPC). The Total Social Financing (TSF) is the real-time transmission mechanism of those policies.

Simply put, the impact of fiscal and budgetary expenditures in China is being transmitted to the real economy via the TSF expenditures. This leading indicator has already peaked, has declined sharply, and is about to fall further (see chart below). This is what happens when you see news article saying that the "credit impulse" of China has rolled over.

             PAM's Leading Indicator of Global Commodity Prices

TSF is a very reliable indicator of future economic activity in China and is therefore an excellent tool in forecasting the future direction of commodity prices. Where commodity prices go, the metals and mining sector will follow.

The recent global commodity bull phase is just about to roll over.

Also, by default, TSF generates the foundation of the US Headline and Core CPI data, the motive force of which are commodity prices, including and specifically, crude oil prices.

The TSF as a harbinger of Chinese activity, and therefore of future price of resource materials, has been discussed in great detail at the PAM community over the past three years that PAM has been operating. I also discussed this instrument in detail in my Seeking Alpha articles.

These will be the consequence of the (TSF) slowdown: (1) As a consequence, China's Leading Economic Indicator (LEI) will also decline very soon; (2) The fall in Quaasi Money Supply (shadow banking liquidity) which dropped precipitously from April, last year, shows no bottom in sight while the (TSF) keeps on falling (see graph below); (3) the decline in M2 Money Supply will soon resume, following the trajectory of the budgetary expenditures.

robert.p.balanModeratorLeaderMar 14, 2021 1:31 PM

ikswo123 -- MV is really a GDP function because its divisor is the GDP

Money Velocity and the GDP Implicit Price Deflator are excellent, leading analogs of bond yields  -- the 10yr yield is "mapped" into both.

ikswo123Mar 14, 2021 8:35 PM

Agreed RB, both map JMK's "animal spirits". i.e. Hoarding > low GDP, spending > high GDP. Trying to time the pivot when fear recedes. My guess is very soon. Now for Macao gamblers and Florida spring breakers, April-June for rest of U.S., Holiday time for Euroland., Late 2021 (Southern hemisphere summer) for South America and Africa.

freer7Mar 15, 2021 12:08 AM

China Becomes First Major Economy to Start Withdrawing Pandemic Stimulus Efforts

As its economy rebounds, Beijing begins a delicate process that will influence the domestic and global recoveries

robert.p.balanMar 15, 2021 2:05 AM

*THERE GOES THE COMMODITIES BULL PHASE*

robert.p.balanModeratorLeaderMar 15, 2021 2:18 AM

freer7 -- Robert, what do you think of Nordea's call on huge infl surprise in Q2 based on NFIB data (6m lead) aided further by Biden's stimmy chq directly into consumers and SMEs, which is inflationary?

Yes, these are inflationary, but CPI lags behind by a year-

-freer7Mar 15, 2021 2:21 AM

Much thanks!

robert.p.balanModeratorLeaderMar 15, 2021 11:07 AM

Albert.Food -- "What is the best way to hedge a portfolio with commodity heavy exposure? Long DXY?"

Yes, absolutely. But you have to be careful about the timing. There may be one more dip in the US Dollar (DXY). The Dollar is inversely "mapped" to the Global GDP (nominal), as global yields (nominal) may yet make a trough (probably by May-June 2021). So time the bottom of the Dollar (and the top of the commodities) exquisitely . I will tell you when to do it -- just remind me occasionally to apprise you.

robert.p.balanModeratorLeaderMar 15, 2021 1:07 PM

*"Biden giveth, and Biden taketh away"*

_*Biden Plans Biggest Federal Tax Hike Since 1993 To Fund Infrastructure, Climate Initiatives*_

Biden Plans Biggest Federal Tax Hike Since 1993 To Fund Infrastructure, Climate Initiatives

The overall program has yet to be unveiled. Nevertheless, analysts are penciling in between $2 trillion to $4 trillion.

*THERE GOES THE EQUITY BULL MARKET*

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