Against the Grain

Today we saw how the service sector of the world economy performed with a string of Nov service sector PMI data; Russia 37.2 (47.4); Italy 39.5 (45.7); France 46.2 (47.5); Germany 45.1 (48.3); Euroland 42.5 (45.8) and the composite index 38.9 a record low; the UK 40.1 (42.4) and in the US they call it the non manufacturing composite index 37.3 (44.4). These are poor numbers but not as disastrous as the manufacturing series.

The US weekly ABC / Washington Post consumer sentiment index was -54 a new low. The Nov US auto sales fell 37% to 747 k units the lowest annual rate in 26 years, the seasonally adjusted annual rate is 10.2 million units the lowest since ’82 (Oct 10.6 mill units) and a year earlier 16.1 million units. These figures appeared as the Detroit Three submitted a new proposal to Congress seeking a combined US$ 34 billion rescue package. Trading was subdued in Asia with metal prices drifting lower into the London open and beyond as the PMI data dampened sentiment and saw European equities down. The LME stocks continued to rise overall, cu fell 250 cancelled warrants fell and free stock rose as al dominated and zn saw Sing land 8250 as we hear Chinese material arrives. The Oct Euroland retail sales fell 0.8% (Spt -0.2%) annually falling 2.1% (-1.6%). In the metals First Quantum’s Kananshi cu mine in Zambia is cutting its workforce to reduce costs. Reuters reports that an official from the Chinese Nonferrous Metals Industry Association says the central government could extend its buying of al metal to include all metals. The Chinese state run research group Antaike expects the country’s al consumption to rise 8.5% this year to 13 million tonnes and 3% in ’09 to 13.4 million tonnes. The threat of power outages in South Africa have been reduced by the drop in global demand for metals resulting in the shutting of ferro chrome and other smelters. The pb price is testing US$ 1000 / tonne (low 970) as the Magellan mine in Australia looks set to export concentrates in its Esperance stock and then export mine stock through Freemantle after settling a year old environmental issue.

The Qatar oil minister said OPEC will definitely cut output at its Dec 17 meeting in Algeria. The US cu miner Freeport said it will reduce output targets by 5% (91 kt) in ’09 and 11% (226 kt) in ’10 in reaction to the world slowdown. An economist we follow closely recently told us that the key to a US economic recovery is a turn in the housing market so here is some good news, after the Fed pledged to buy mortgage backed debt the weekly MBA index of applications to purchase a home or refinance a loan rose 112% to 857.5 the highest since Mch (refinance index rose 203% and purchase index up 38%). Ahead of employment data Fri the Nov ADP National Employment private payrolls report fell 250 k more than the expected 205 k (Oct revised to -179 k from -157 k). The revised Q3 non farm productivity rose 1.3% more than expected and unit labour costs up 2.8% less than the original +3.6%.

For the past fortnight we have been highlighting a divergence in the markets from the trend that existed for at least six months. This was led by the equity market that raced higher in hindsight from two events, the naming of the Obama economic team which engendered a feeling that all would be well at the same time US equities looked oversold after plumbing five year lows. This rally occurred despite a string of poor world global economic data that threw out a large caution sign to commodities and others. Hence last week the DJI rallied 1225 points (16%) while bond yields declined 0.26%; cu up US$ 79 / tonne; gold US$ 18 / oz and oil US$ 2.7 / bbl. The collapse in global manufacturing PMI data seems to have chilled equity investors overnight. With manufacturing PMI so low we would warn against getting disheartened this close to the bottom of the spectrum. The ISM readings are between 0 and 100 with 50 the tipping point between contraction and expansion. Looking at the Nov data and anecdotal evidence one gets the feeling that the inventory pipeline is running on empty and a modest pick up in activity in reaction to the recent government monetary and fiscal stimuli could catch the supply side wanting. In recent days the wild gyrations in equities have left the metals and other commodities in a far more narrow range which could signal the fall in demand and the supply side reaction might see prices begin to establish a base.

As equities sold off overnight Asian central banks took further action in Australia the RBA cut rates by 1% to 4.25% and the BoJ held an emergency meeting keeping rates unchanged at 0.3% while signalling an acceptance of lower grade corporate bonds (BBB) as collateral for banks and business seeking funds. On Thurs the BoE and ECB meet and they are expected to cut rates with the Fed following later in the month. (Dec 16). There were moderate increases in all LME metal stocks. The Oct Euroland PPI fell 0.8% the biggest fall since ’86 as the oil price slumped yoy the rate was 6.3% (7.9%). The Russian ni miner Norilsk plans to cut 1150 jobs as the closed and shuttered Australian operations while creating a single entity for its non Russian activities.

No US data allowed the markets to settle after the beating they got y/day following the NBER committee report that the economy moved into recession in Dec ’07 and looks set to become the post ’45 record. The average recession in this time has lasted 10.5 months with the two longest 1973 / 75 and 80 / 81 being 16 months. The US equities recovered with the DJI up 200 points at 16:30 on the back of some confidence of further official stimulus and Ford submitting a reconstruction plan to Congress. Tomorrow sees another burst of data as we see the service sector PMI data which will give a picture of the broader economy.

Dec started on a bad note as the Nov manufacturing purchasing managers index (PMI) showed a significant deterioration of sentiment in industry globally - Japan 36.7 (Oct 42.2); the official Chinese figure 38.8 (44.6) and the private CLSA 40.9 (45.2); India 45.8 (52.2); Russia 39.8 (46.4); South Africa 39.5 (46.2); Germany 35.7 (42.9); Euroland 35.6 (41.1); US 36.2 (38.9) and JP Morgan global manufacturing PMI 36.4 (42.3) A reading below 50 signifies the sector is contracting. This indicates that metal demand will remain under severe pressure which could see production cuts gather pace.

Over the weekend an informal OPEC meeting saw no production cuts however they are expected at the next formal meeting to be held in Vienna in mid Dec. The Russian central bank raised rates to 13% from 12%. In Japan Nov domestic car sales fell 27.3% yoy (Oct -13.1%). The Oct German retail sales fell 1.6% (Spt -1%). The LME stocks were dominated by another major rise in al although a fall in cu helped offset this. From China Reuters reports that Yunnan province will buy 1 million tonnes of base metals to help smelters in the region that are struggling with weak domestic demand and low prices. The province will buy 150 kt of cu, 300 kt al, 150kt pb, 300 kt zn and 100 kt of sn with these reserves kept for twelve months.  Korea Zinc, the world’s second-biggest zinc refiner, will cut production by 10 % for the next 13 months, reducing output by 45 kt subject to changes in market conditions. The non traded metal cobalt has seen it price fall to US$ 15.0 / lb. The Australian second tier miner OZ Minerals has requested its share be suspended till Dec 29 as it tries to refinance US$ 360 million of debt. The governor of Indonesia’s Banka – Belitung has asked the central government to limit ’09 sn production at 75 kt rather than the present 90 kt level proposed.

The academic National Bureau of Economic Research today said the U.S. economy entered a recession a year ago this month, “The committee determined that the decline in economic activity in 2008 met the standard for a recession” the group said. The 1.2 million drop in payroll employment so far this year was the biggest factor in determining that start of the contraction. The 73-month economic expansion, lasting from Nov ‘01 to Dec ‘07, was well short of the previous cycle that lasted a record 10 years. At 12 months, the current contraction is already longer than the last slump that covered the eight months from Mch to Nov ’01. The devastating manufacturing data put the economy to the fore again after last week’s euphoria at the new Obama economic team. This sent metals, equities, commodities and bonds lower.

One of the dangerous side effects of the present economic environment is the increase in socio political unrest. This appears to be occurring across the globe with reports of labour disputes in China, rising piracy, increased troubles across Africa and Asia. While a lot of these issues have been ongoing reduced aid and development funds will exacerbate the problems. Cash can hide a multitude of sins and as we know African despots only fall when the State House pantry is empty.

Quiet Asian session saw prices arrive in London pretty much unchanged. Not even a Reuters report raising the spectre of the Chinese State Reserve Bureau (SRB) buying metal moved things although that threat always exists. In the past the actions of the SRB tend to be quiet secretive so we doubt they will telegraph buying till it is completed. The weekly Shanghai stocks declined cu by 1364 tonnes to 16,335; al 2198 tonnes to 199,958 and zn 1277 tonnes to 68,292 There was quite a lot of Oct Japanese data - unemployment was 3.6% (Spt 4%), household spending fell 3.8% (-2.3%), the CPI was 1.7% yoy (+2.1%), industrial production fell 3.1% and -7.1% yoy to a record low (+1.1% and +0.2% respectively) and retail trade  fell 0.6% yoy (-0.3%), construction orders jumped 47.2% yoy (+10.3%). Nov small business confidence was 35.1 (37.6). The Indian Jul / Spt quarter GDP rose 7.6% the lowest pace in 4 years (7.9%) with manufacturing growth at 5% from 9% a year earlier. The Malaysian Q3 GDP was 4.7% yoy (Q2 6.7%). The UK Nov GfK institute consumer confidence survey improved to -35 (Oct -36). For a second day in succession stocks rose in all the LME metals and more significantly for the first time in ages they all increased on a weekly basis; cu by 8.5 kt; al 78.5 kt; zn 5 kt; pb 150 tonnes; ni 1812 tonnes and sn 240 tonnes. The Euroland Oct jobless rate rose to 7.7% (Spt 7.5%) as the Nov flash yearly CPI declined to 2.1% (3.2%). This falling inflation data combined with weak economic data is raising expectations that the ECB will carry out a significant rate cut next week and helping the US$ recover.

Over the weekend OPEC meets in Cairo ahead of a formal meeting mid Dec it is possible a further production cuts could be announced. Chilean Oct cu output fell 7% to 450 kt in the year to Oct output is down 3.5% yoy at 4.435 million tonnes. This was reported as the country’s Oct industrial production fell 0.8% yoy (Spt +3.2% yoy).