November 19, 2021 | 13:00
Roll Over Baltic Dry, and Tell WTI the News
Just as it looked like supply disruptions and related inflation pressures had fully absorbed market attention—with the B.C. disaster a harsh exclamation mark—COVID concerns re-emerged this week. A renewed rise in virus cases in many developed economies, tighter restrictions in some countries, and another lockdown in Austria sent a shiver through risk assets. Bond yields ended slightly lower, the Canadian dollar faded further, equities cooled (albeit the S&P 500 reached record highs Friday morning on soaring tech), and a variety of commodities took a step back. Specifically, oil dipped roughly 6% to $76, dimmed both by a modest risk-off move, and indications that both the U.S. and China will release some of their petroleum reserves to calm prices.
The retreat in yields and commodities unfolded even amid yet more evidence that the run-up in inflation is going global. Following last week’s shock U.S. 6.2% headline CPI reading, others stepped mostly in line. In descending order, this week we saw October inflation come in at 4.7% in Canada, 4.2% in Britain, 4.1% in the Euro Area, and… +0.1% y/y in Japan. Okay, almost global.
Even with the ongoing upward march in headline inflation in much of the world, there were still some faint signs of relief. That may be hard to swallow in Canada, amid the latest blow to a fragile supply chain from the B.C. flooding and the extensive damage (we dig into the potential economic impacts in Focus). But the Baltic Exchange Dry index, one measure of global shipping costs, is finally fading. It has been chopped in half from its early October peak and is at a seven-month low (although it has still doubled in the past year). And beyond the big drop in oil, commodities are more broadly easing, with base metals and natural gas pulling back in recent weeks (although lumber popped on the B.C. floods).
Most importantly for the inflation outlook, the steam seems to be coming out of the energy market (for now). The pullback in prices this week was in spite of relatively bullish inventory data. And, U.S. oil production is now grinding erratically higher—in the past four weeks, it has averaged 11.4 million bpd versus 10.8 mm in the first half of the year. It’s still the case that the recovery in output has been quite stunted compared with past episodes, and given the still-high level of prices, with output far below the pre-pandemic peak of around 13 mm barrels. We remain broadly constructive on oil prices over the medium term, but have based our 2022 projections for inflation and growth on an assumption of an average WTI price of $70-to-$75 next year, well within reach based on this week’s action.
Looking at the broader inflation forces, we remain firmly on the high side of consensus expectations. Even if supply pressures ultimately ease in the coming year, demand pressures appear nearly indestructible. Despite the market ripple on virus concerns late this week, the pandemic is likely to become less of an economic issue in 2022—yes, it can still throw sand in the gears of the recovery, but it’s unlikely to be the dominant story next year. Meantime, households remain well-supported by prior government efforts, the boom in asset prices, rising employment, and stronger wage gains. Fundamentally, the outlook for consumer spending is still solid, particularly in North America, and that’s even after accounting for inflation.
Contributing some on-the-ground evidence this week on the power of consumers, the 1.7% rise in U.S. retail sales last month left them a towering 16.3% above year-ago levels. That’s a full 10 percentage points north of the well-advertised inflation rate, and it’s not like sales were depressed last October. Essentially, retail sales took a giant step higher in March after the last round of stimulus payments, and have never looked back. At the same time, a wave of top retailers unveiled their Q3 results this week, and the overall tone was very positive.
It’s a broadly similar, if more muted, story in Canada. Retail sales look to have bounced back 1% in October after a small 0.6% step back in the prior month. Because government support has taken such a different form in Canada—no stimmies here, although overall measures have been every bit as generous—and because reopenings have been much more constrained, spending is up a notably milder 5% y/y, or just barely above headline inflation. The supply constraints on autos have weighed, with ex-auto outlays up more than 6%.
While retail sales may be lagging a bit, Canadian households have taken a backseat to no one in their willingness to shell out on housing. The latest resale activity showed a clear reheating in the market, with sales already reaching an annual record high in the first 10 months of the year, and prices now up a massive 23.4%
Summing up, there were some flickers of relief from global supply pressures this week, despite the awful news from B.C. and another round of meaty headline inflation results in many key economies. However, the relentless pressure from powerful consumer demand—which we believe is the ultimate source of this year’s high-side surprise in inflation—remains firmly in place. As for whether oil prices will now dampen inflation, we will again quote the late, great Chuck Berry: You never can tell.
This week’s title could easily have been “Roll Over Bitcoin, and Tell Ethereum the News”, given the tough few days those ‘currencies’ had. Still, crypto has officially gone mainstream. As of Christmas Day, the LA arena formerly known as the Staples Center will be dubbed Crypto.com Arena. Really rolls off the tongue, eh? Besides the many, oh-so-predictable, jibes about playing in the “crypt”, there is the small matter that history does not favour companies paying fat fees for naming rights. The deal is for a mere $700 million over 20 years (or about LeBron James’ pay). There is a long and cluttered list of firms that have paid up big to get their name on stadiums… at the very top of their days, only to then fade fast, or worse. In fact, one doesn’t have to hunt hard for the so-called stadium curse. Quoting CNBC:
“Perhaps the biggest and most well-known faux pas in stadium naming, Enron Field was a PR disaster for the Houston Astros after the sponsoring company, Enron, was flung into bankruptcy after its infamous corporate scandal. The Astros had signed the naming deal in 1999, when Enron was seen as a Wall Street darling. Two years later, Enron collapsed after an elaborate accounting fraud was exposed. The team bought back the stadium’s naming rights for $2.1 million after Enron filed for bankruptcy.” Of course, the Astros later had a PR disaster of their own making, but that’s another story.
And from Thestreet.com, this beauty on Baltimore: “During the dot-com era, there was no better way to say “this company won't be here in a decade” than to put its name on a stadium. For those of you who don't remember that period or blocked out the losses with some extraordinarily selective amnesia, PSINet was one of the nation's first Internet service providers. In the spirit of the times, PSINet bought itself some stadium naming rights in 1999 and just waited for the money to start flowing in. Two years later, and just after the Ravens won their first Super Bowl, PSINet went bankrupt and its stadium signage was thrown into the same scrapheap as the Pets.com sock puppet.”
The soon-to-be-mighty New England Patriots had a very similar story with CMGI. “The tech and venture capital company was set to paste its logo all over the Patriots’ new home field for 15 years when it agreed to a $114 million naming rights deal in 2000. That agreement didn’t even make it to the stadium's first kickoff. The tech bubble burst and CMGI was reduced to a penny stock before fading into obscurity.”
Naturally, there are a number of success stories in naming rights, and companies that are mostly consumer-facing with solid brands are seen as the natural fit for such. But for others, who seize on a moment when their stocks are flaring, many have come to grief shortly after shelling out big. Hubris, anyone? This is not a call on the market, but let’s just say the parallels between dot.com darlings in 1999/2000 and crypto now are striking.