Archive for September, 2013

Jumping Ships

Two years ago this blog noted anomalous behaviour from an indicator which receives relatively little attention: the Baltic Dry Index. Tracking the price of shipping dry bulk cargo (and thus excluding oil, LNG and containers), it has bounced by 61% so far this month. If that level can be sustained it would represent the biggest monthly rise since May 2009. To recap from the dark days of autumn 2011:

The Baltic Exchange in London, which publishes the index, estimates that such cargo comprises two thirds of seaborne trade. In their view, dry freight prices are driven by six factors: fleet availability (supply), commodity demand, seasonality, fuel prices, threats to choke points like Suez or Panama, and sentiment among freight market participants.

The last point touches on the key distinguishing feature of this index. Unlike oil, or copper, or gold, the price (or future price) of shipping capacity is not traded on financial markets. So there are no flows of speculative or investment capital to distance the index from its fundamentals.

A 61% rise over thirteen trading days shows just how volatile the index is, but it can still be useful. In the second half of 2011 for instance, its rise coincided with what turned out to be sharp growth recoveries in the US and Japan. This ran counter to the grain of market fears at the time, to say the least – some were still expecting Italy to default, and downward revisions to US GDP data had been largely responsible for kicking off the summer crash. A few months later, however, Europe re-entered recession (along with the UK as it was thought at the time), Chinese demand slowed and the Baltic Dry Index slumped lower again.

Markets are not so suicidal as they were a couple of years back, but they have still been sending some mixed signals. The developing world is confident that surer recovery will deliver buoyant earnings, for instance – but emerging markets are thought to be immune from this. The Shanghai Composite is down 3% in price terms for the year to date, while the S&P 500 is up 21%.

And yet reading coverage of the shipping market (e.g., e.g.), it is clear that the key driver of the rise in the Baltic Dry so far has been demand for iron ore and coal from China. With Europe recovering, as well as the domestic property market, it seems unlikely that this is a freak event. And for what it’s worth, Bloomberg data shows that reported earnings for the Shanghai Composite index have risen more quickly than they have for the S&P 500 this year, and are forecast to continue to do so.

As ever it does not do to get too excited, especially by a solitary measure. In the commodity space itself, base metals prices have yet to present a similarly clear indication of a rebound in activity for example.

But there is something to be said for 61%.

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19/09/2013 at 5:35 pm

The Forecast Also Rises (2)

About 18 months ago this blog noted some upward revisions to the regular growth forecasts made by the IMF. Coming in the wake of the carnage of summer 2011, which at one point threatened to see the bond market break Italy, this was a welcome reminder that observers can also perceive the economic outlook to be brightening. Of course this was followed by the shock of the election results in Greece. Thereafter gloom, particularly over Europe, took hold again for a while.

This week, however, a different group of economists had another try. The OECD published an “Interim Economic Assessment” on Tuesday which saw real GDP forecasts for the UK and key eurozone countries revised up. Germany, which had been expected to show growth of 0.4% for 2013 in the organisation’s full report back in May, is now expected to deliver 0.7%. The French outlook has been revised up from -0.3% to 0.3%. And in the UK, growth is forecast at 1.5% as against 0.8% in the spring.

In fact this is not very surprising news. Purchasing manager surveys, which indicate the level of expansion or contraction in activity across different sectors, have been posting new highs of varying significance over the last few months. The composite PMI indicator for the eurozone turned positive for the first time in eighteen months this July, and last month rose to a level not seen since before the 2011 crash. In Britain, the manufacturing sector PMI hit the highest point since Q1 2011, the construction sector survey reached a six-year high and the service sector showed the strongest level of activity since the end of 2006. (The UK benefits both from the turnaround across the Channel and from the ongoing recovery in residential property, whose importance we highlighted some time ago.)

There is always something to go wrong of course. Apart from deep scars in Europe, flare-ups in emerging markets and sluggish global growth there is now the escalation in rhetoric to consider between the world’s two nuclear superpowers who find themselves ever more overtly on opposing sides of the same grisly civil war. Nonetheless, left field events – including war – aside, it is good to see a respected body such as the OECD joining the ranks of the cautious economic optimists.

Taken together, the countries of the European Union form the largest economy in the world. Even a subdued and sub-trend pace of recovery here will come as a significant boon to global activity.

We have become so used to recession in recent years that we are only just beginning to adapt our perspective to that context.

06/09/2013 at 5:35 pm


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