The chemical industry remains the best leading indicator for the global economy. The only problem is that most policymakers continue to ignore its obvious message about the failure of their stimulus policies to restore growth.
2 months ago the blog highlighted how its IeC Downturn Monitor was indicating that:
“Markets appear to be continuing to move, slowly but surely, into their expected ‘scary phase’. The reason is the massive distortions that have been created in financial markets, and in China’s housing market, by the $35tn+ of stimulus from governments and central banks since 2009.
August’s survey of regional operating rates from the American Chemistry Council (ACC) reinforced the message, as the blog noted:
“The chemical industry is the best leading indicator for the global economy. The slide in operating rates around the world during the seasonally strong Q2 period. is a clear warning that global economic growth may be stalling”.
And then last month, it reported new ACC data showing that “the weak performance is continuing with production slowing slowing almost everywhere”, whilst countries such as “Germany, for example, have gone from 4.8% growth in February to a fall of 3.5% in August”.
But it was only last week that the wider world began to wake up to what is happening. Suddenly the headlines were all about a potential German recession.
A STEEP DECLINE NOW SEEMS UNDERWAY
In oil markets, the International Energy Agency has warned that “the recent slowdown in demand growth is nothing short of remarkable.” And worryingly, as the chart above confirms, this week’s update on key products in the blog’s Downturn Monitor portfolio confirms that a steep decline may now be underway:
- Naphtha prices, the basic petrochemical feedstock, are down 22% since January (black line)
- PTA prices in China are down 16%, with their earlier rally completely wiped out (red)
- Brent oil prices have been under pressure since July, and are now down 14% (blue)
- The S&P is also showing weakness, with some panic selling taking place last week (purple)
The blog will look at oil prices in more detail from Wednesday. But the chart is confirming that the Great Unwinding of policymakers’ failed stimulus policies is now underway. The problem is that these policies had the effect of increasing prices to record annual levels – thus creating a vicious circle of increased supply and demand destruction.
And now, most significantly, the S&P 500 Index is coming under pressure as well. Lack of demand translates into lower earnings, which means lower stock prices. Yet these are currently priced for perfection, so the Unwinding could prove very scary indeed.
One critical question, of course, is what might be the signal for this scary phase to develop? The most likely answer to the question in an interview with Prof Robert Shiller (a key influence in the blog’s Great Unwinding series). He told the Wall Street Journal:
“If a sudden consensus about economic stagnation forms, that could be a dangerous “turning point.”
Worryingly, some very recent headlines – on Germany, for example – suggest we may now be moving in this direction.
WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Naphtha Europe, down 22%. “Prices have fallen on continual downward pressure from exceptionally long supply and low upstream ICE Brent crude oil values.”
PTA China, down 16%. ”Demand did not pick up even after the week-long Chinese holiday, and inventories were heard to be building up”
Brent crude oil, down 14%
Benzene Europe, down 7%. “Prices saw an uplift this week, largely on the news that Shell has declared force majeure on certain products out of its Moerdijk facility in the Netherlands”
US$: yen, up 3%
S&P 500 stock market index, up 4%
HDPE US export, up 13%. “A PE buyer said the export market was dried up.”