IMF Chief Highlights "Fundamental Shift" In Global Economy

Cop28 in the UAE will be the most significant climate conference event since Paris, when countries pledged to limit global warming to 1.5°C above pre-industrial levels, the event's director-general said on Thursday.

Majid Al Suwaidi said the Emirates would make inclusivity the hallmark of its presidency as "we need everyone to address climate change".

"Cop28 is going to be a landmark Cop because the UAE is highly ambitious about making the moment count. And that is not just about the formal text that gets negotiated at the end," he said.

He added that Cop21, where the Paris Agreement was adopted by 196 parties in 2015, was a milestone because, for the first time, all countries in the world agreed to set targets for cutting emissions.

"But we knew at the time those targets wouldn't be enough to get us where we need to be, so we built into the agreement a mechanism to come back in five years to take stock and to raise ambition, he continued.

"That is what is mandated to happen for the first time at Cop28 UAE."

Mr. Al Suwaidi was delivering his keynote address at the Countdown to Cop27 event held at Jumeirah at Saadiyat Island Resort — jointly organised by The Economist and First Gulf Bank in Abu Dhabi.

He said the decision to bid for Cop27, which will be held at Expo City Dubai, was driven by the "positive story" that the UAE has to tell about the benefits of embracing climate change.

"We knew that stepping into the spotlight would draw criticism. The question on many minds is, why are we doing it?" he said.

"First, because climate action is something the UAE really cares about. The UAE leadership recognised the risks of inaction on climate change."

He added that the UAE is ahead of its time in embracing the economic potential of action on climate change.

"The global employment in renewables reached 12.7 million jobs last year, with predictions of 40 million jobs worldwide by 2030 and 122 million by 2050," Mr. Al Suwaidi said, citing recent data from the International Renewable Energy Agency.

The UAE was the first country in the region to adopt the Paris climate change action mandate and also the first to declare a target of net zero by 2050.

He said the UAE is taking on the presidency because "we believe we have the expertise to make a real difference".

As an energy-exporting nation, he said the UAE understands the realities of what it is going to take to get to net zero.

Mr. Al Suwaidi said there is a need to get the developing world to transition to clean energy as soon as possible.

"Leading by example, the UAE has provided over $1.5 billion of aid for renewable energy projects in more than 40 developing countries," he said.

The UAE has led the way in the region by building three of the largest solar plants: the Mohammed bin Rashid Al Maktoum Solar Park is the largest single-site solar park in the world and will be able to generate 5,000 megawatts by 2030. The $600 million Shams 1 is the largest concentrated solar power plant outside the US.

"We are an early pioneer in the emerging hydrogen market. We have established the first nuclear plant in the region," said Mr. Al Suwaidi.

The UAE is also one the world's largest international investors in renewable energy projects — with a total spending of $50bn in 70 countries to date and with another $50bn to invest by 2030, he pointed out.

He said the UAE wanted to host Cop28 because it is well placed to bring people together and build global consensus.

"Here in the UAE, we have been big believers in the international system," he said.

The UAE will work hard next year to build consensus, create coalitions and bring people together before it welcomes the world to Expo City Dubai.

The number of red flags raised by U.S. firms for the earnings outlook suggests Wall Street faces icy headwinds this winter, as rising borrowing costs and mortgage rates hit households and the rampant dollar squeezes overseas profits.

Corporate earnings growth forecasts have fallen recently but there is more to go. Once this is fully factored into equity prices, the S&P 500's current rebound may prove to be nothing more than a classic bear market rally.

Full-year S&P 500 earnings growth forecasts have been slashed to 4.5% on aggregate from over 11% three months ago. The IBES weighted 12-month forward earnings growth estimate has fallen to a 2022 low of 7.2% from almost 10% in the summer.

But these numbers are only really starting to come down now and will likely decline further in the coming months, paving the way for an earnings 'recession'. This will replace the Fed's aggressive rate-hiking campaign as the main market driver.

"I don't believe the downward revisions are done yet. There's still a ways to go, and that will be the next leg down for equities," reckons Ryan Nauman, market strategist at Zephyr.

At the market high in January, the S&P 500's 12-month forward price-to-earnings ratio was over 21.0. It is now just below 16.0, but that is still only around long-term averages.

The problem for investors is an earnings decline on its own mechanically pushes up the PE ratio, making stocks more expensive. This suggests the price component needs to fall to lower the multiple and make stocks more attractive to buyers.

The S&P 500 index earnings are currently around $235. Analysts at Citi expect that to fall to $221 by the end of this year and $215 next year, or even lower if recession hits hard.

The first tremors came in July when Walmart issued a profit warning. Since then, FedEx withdrew earnings guidance, Nike warned of a margins squeeze from high inventories; Apple said it will not boost iPhone 14 production due to sluggish demand; and on Tuesday Hasbro cut its revenue forecasts.

The common thread going into the peak retail season with the Thanksgiving and Christmas holidays is that consumer spending is likely to be lower than firms had hoped.

S&P Global Market Intelligence research shows that the 'consumer discretionary' sector, which is highly sensitive to the economic cycle, is becoming the riskiest on Wall Street.

It has recorded the sharpest increase in the share of firms lowering corporate guidance this year. The number of companies that did so in the third quarter more than doubled from the second quarter, and was 10 times higher than the first.

The challenges facing U.S. consumers are growing in number and severity.

Mortgage rates have reached 7%, the highest since 2008 and a major blow to first-time buyers and homeowners switching to new rates. The reverse wealth effect is already beginning to play out as housing market activity slows.

Inflation is easing but it remains sticky, and higher than average wage growth. Workers' disposable income is being squeezed, just as cracks are starting to appear in the labor market.

On top of that, the dollar's appreciation is bad news for U.S. corporate profits. Around a third of S&P 500 companies' sales are overseas, and the dollar is up 16% so far this year, on course for its biggest annual gain in 50 years.

Mike Wilson, head of U.S. equity strategy at Morgan Stanley, says that, all else equal, the exchange rate is effectively a 10% headwind to fourth-quarter S&P 500 earnings per share.

In this light, it is hard to see how the historic corporate profit margins in the April-June period will be repeated in the second half of the year.

Wilson has been one of the most bearish - and accurate - analysts on Wall Street this year. He agrees that the darkening earnings picture has played second fiddle to the Fed this year, but not for much longer.

"Companies are loathe to throw in the towel on future quarters until they have to. It appears that more are reaching that point where they can't fight it anymore," he and his team wrote on Monday.

They point to the equity and bond market dynamics on the last day of the third quarter, and the S&P 500's previous low on June 16.

The index's forward EPS and PE ratio slipped 1% to $236 and 15.2, respectively. Meanwhile, 10-year nominal and real yields soared more than 60 and 100 basis points, respectively, and the equity risk premium fell more than 50 bps.

Basically, the slump in stocks from mid-August was led by rates rather than a major shift in the earnings outlook. With the implied Fed terminal rate unlikely to get much above the September high around 4.80%, that won't be the case from here.

Oil prices continue to strengthen following the 2MMbbls/d paper cut announced by OPEC+ on Wednesday. ICE Brent settled a little more than 1.1% higher yesterday, leading the market to trade above US$94/bbl. The crude oil market is now on course for its best week since mid-April.

Following the OPEC+ meeting, the Saudis released their official selling prices (OSPs) for November loadings yesterday. Aramco left the OSP for its Arab Light into Asia unchanged at US$5.85/bbl over the benchmark. Meanwhile, Europe saw cuts of US$1.80/bbl for both extra light and light grades. There were smaller cuts of US$1.50/bbl for both medium and heavy grades. All grades to the US saw a marginal increase of US$0.20/bbl.

The latest data from Insights Global shows that refined product inventories in the ARA region increased by 131kt over the last week to reach 5.33mt. Fuel oil stocks saw the largest increase, growing 83kt over the week to 1.13mt. Gasoil and jet fuel inventories increased by 27kt and 43kt respectively. Naphtha and gasoline inventories saw some moderate declines over the period.

As for the European gas market, noise around a possible price cap continues to grow. According to Bloomberg, Belgium, Italy, Greece and Poland have proposed implementing a price cap on natural gas, which would include a corridor/range that would allow prices to trade within a certain range of the cap. The EU will need to be careful with how they go about trying to cap gas prices. This type of intervention will make it more difficult for the market to balance through needed demand destruction.

In the US, natural gas prices continued to edge higher yesterday, despite the EIA reporting the largest weekly increase in inventories since 2015. US natural gas inventories increased by 129bcf, which was above market expectations of around 123bcf and also well above the 5-year average of 87bcf. Despite this large increase, total US natural gas inventories are still 7.8% below their 5-year average.

The London Metal Exchange said it will restrict new deliveries of metals from Russia’s Ural Mining & Metallurgical Co. and one of its subsidiaries after the UK placed sanctions on co-founder, Iskandar Makhmudov. Starting immediately, metal from UMMC or the Chelyabinsk Zinc unit can only be delivered to LME warehouses if the owner can prove to the exchange that it won’t constitute a breach of sanctions, including that it was sold before Makhmudov was sanctioned by the UK on 26 September, and that neither company has any economic interest in the metal. The LME said that UMMC copper, which is currently listed in the LME warehouse system, is not subject to the sanctions. There is no zinc produced by Chelyabinsk in LME warehouses.

Last week the LME said it planned to launch a discussion paper considering a potential ban on new supplies of Russian material, including aluminium, copper, and nickel. Russia’s Rusal said that any move by the LME to restrict deliveries of its metal would damage the exchange’s standing in the global markets. The aluminium producer made the statement in a letter to customers, as it steps up a lobbying campaign against any possible move to block Russian metal. Rusal said that restricting deliveries of its metal would “create uncertainty around the role of the LME in the market” and make the exchange “less attractive to all participants.” Rusal is the world’s largest aluminium producer outside of China and accounts for about 6% of the world’s production.

Although Russian metals, including aluminium, copper and nickel are not officially sanctioned, self-sanctioning could already be disrupting trade dynamics in the global metals markets.

In its first estimates for 2022/23, Brazil’s National Supply Company, CONAB, forecasts domestic soybean production to increase by 21.3% YoY to 152.4mt largely on account of better yields. As Brazil recovers from drought in 2021/22, CONAB estimates soybean yields to increase 17.4% YoY to 3.6t/ha. Meanwhile, soybean acreage could also increase by around 3.4% YoY to 42.9m hectares. Comparatively, in the previous WASDE report, the USDA estimated that Brazil’s soybean production would increase by 18% YoY to 149mt. Considering the higher estimates from CONAB, the USDA could also increase Brazil’s soybean supply estimates in next week’s WASDE report. CONAB expects higher domestic production to support exports as well, with external shipments rising around 22.5% YoY to 95.9mt in 2022/23. Meanwhile, CONAB forecasts corn production to increase 12.5% YoY to 126.9mt, again largely due to better yields as the weather improves. Domestic corn yields are expected to increase 8.4% YoY to 5.7t/ha, whilst corn acreage could also increase 3.8% YoY to 22.4m ha.

The Thai Sugar Millers Corp estimates domestic sugar cane production will increase to around 110mt in 2022/23 compared to around 92.1mt in 2021/22 due to better weather and supportive government policies. This would be the largest Thai sugar cane crop over the past three years and would help boost export supply from a key global exporter.

India's rupee will trade near its record low against the mighty greenback beyond this year, buffeted by rising oil prices and an aggressive U.S. Federal Reserve rate-hiking campaign, according to a Reuters poll of FX strategists.

Steamrolled by the Fed-pumped dollar, the rupee has fallen over 10% this year and reached an all time low of 82.22/$ on Thursday, even though the Reserve Bank of India continues to sell its forex reserves to defend the local currency.

While it found brief respite after the RBI delivered its fourth consecutive interest rate hike last week, a widening trade deficit driven by rising oil prices and a slowdown in exports have dragged the rupee down.

That downward trend is unlikely to reverse anytime soon, according to the Oct. 3-6 Reuters poll of 40 FX analysts which showed the three-month median forecast for the currency at 82.00/$, near where it was trading on Thursday.

But the median view of 19 analysts who answered a separate question showed the rupee would fall as low as 83.00/$ before year-end. Forecasts ranged between 82.00-84.00/$.

The rupee was then expected to recover just about 0.7% to trade around 81.30/$ in 6 months and 80.50/$ in 12 months, still not far from its record low. That lines up with expectations in a wider poll for the dollar's dominance to continue beyond 2022.

Although the median consensus showed a marginal recovery in six months, about 25% of strategists, 10 of 39, forecast the partially-convertible rupee to touch 82.5/$ and beyond. None predicted that in a September poll.

Asked what was the best approach to strengthen emerging market currencies against the dollar over the coming six months, around 40% analysts, 18 of 45, said central banks needed to hike interest rates more aggressively. Slightly under one-third said there was nothing that could be done.

Just over 10% of economists suggested central banks should continue selling their dollar reserves.

The RBI has already spent nearly $100 billion of its previous $642 billion pot of dollar reserves and was expected to deplete it to $523 billion by end-2022 to prop up the rupee, a separate Reuters poll showed.

"With FX reserves slowly being run down and dollar strength causing the rupee to go past 80.00/$, FX reserves will be used as "sand in the wheels" to slow the pace of exchange rate movements, rather than protecting any levels," said Sajjid Chinoy, chief India economist at J.P. Morgan.

"The response to global pressures – so far borne largely by FX reserves – will, from now on, be more equitably shared between reserves and interest rates."

1. The 1st meeting of European Political Community was held.

2. Fed officials further strengthen market expectations.

3. IMF President sees global economic outlook "turning gloomy" and recession risk rising.

4. EU countries draft plan for 'gas price corridor'.

5. Institutional analysis: U.S. initial jobless claims exceeded expectations.

6. IEA: European countries will have a harder time next winter.

The first European Political Community leaders' meeting was held in Prague, the Czech capital, on the 6th of local time. In addition to the 27 EU member states, 17 other European countries and regions, including the UK, Turkey and Ukraine, were invited to discuss European security, energy, climate change and economy in the new situation. In his pre-conference speech, Prime Minister Fiala of the Czech Presidency of the EU said that he hopes to open this meeting as a roundtable forum for informal exchanges on the current situation in Europe and other regions. He stressed that the meeting will not form a new European organization or replace the existing forms of cooperation, and the day's meeting will not even adopt any formal resolutions. Observers believe that because of the many differences in some regional issues, the participating countries and regions are difficult to coordinate to form a unified position, the European political community may be reduced to a talk club that can not solve the substantive issues. Some EU candidate countries are concerned that this new mechanism will delay their formal accession to the EU process.

Fed Governor Cook said in his first public remarks on monetary policy after joining the Board of Governors that inflation remains stubborn and unacceptably high, and data from the past few months show that inflationary pressures remain widespread. The recent reduction in job openings, the slowdown in rent increases and some other data showing the easing of price pressures are not enough to conclude that the Fed's anti-inflation efforts are nearing an end. Inflation must come down, and they will continue to work until the task is completed.

Cleveland Fed President Mester said U.S. inflation is unacceptably high. Minneapolis Fed President Kashkari said more work has to be done to lower inflation. Federal Reserve Governor Waller expects to raise interest rates early next year, Friday's jobs report may not change the Fed should focus 100% on reducing inflation. Chicago Fed President Evans said further rate hikes are needed, and the next meeting will discuss whether to raise rates by 50 basis points or 75 basis points, with rates likely to reach 4.5%-4.75% next spring.

IMF President Georgieva said Thursday that the IMF will cut its forecast for global growth of 2.9 percent in 2023 next week, citing rising risks of recession and financial instability. This is the fourth downward revision this year. The forecast for 3.2 percent growth in 2022 is unchanged. She said the global economic outlook is becoming bleak and likely to get worse given the shocks caused by the Covid-19 pandemic, Russia's invasion of Ukraine, and climate disasters on all continents. All of the world's largest economies are now slowing, which is dampening demand for exports from emerging and developing countries, which are already being hit hard by high food and energy prices.

Poland, Italy, Belgium and Greece have drafted a proposal to introduce a "dynamic price corridor" for natural gas in an attempt to hold down high energy prices and soaring inflation, according to documents. EU leaders will discuss whether and how to limit gas prices at a meeting in the Czech Republic on Friday. The EU is considering the idea, but has not yet made a formal proposal. Meanwhile, some countries have drafted their own proposals.

Agencies noted that the number of people filing for unemployment insurance in the U.S. last week was higher than expected, although still at a record low, the latest sign that labor demand may be starting to slow. A continued rise in initial jobless claims would suggest that spending across sectors is sluggish and that uncertainty about the economic outlook is prompting some companies to lay off workers. Nonetheless, claims remain low and continue to indicate a strong labor market. Nonfarm payrolls will be released on Friday, and the September employment report is expected to show a 260,000 increase in nonfarm payrolls. While this will be the lowest one-month job addition since the decline in late 2020, it is still a strong gain and indicates a strong labor market. The unemployment rate is expected to remain near a 50-year low, and average hourly earnings are expected to grow strongly again.

At present, although many European countries said they have stockpiled enough natural gas for the winter, International Energy Agency (IEA) Administrator Fatih Birol said in a media interview in the Finnish capital Helsinki on Wednesday that even if this year can go through the winter, if the situation does not change, next winter will be more difficult for European countries. After a winter of gas consumption, it is expected that by February-March 2023, European countries' gas reserves will be depleted to 25 to 30 percent of their stocks. At that time, if the European gas supply is still not effectively solved, then next winter will be more difficult, European countries will face a more severe energy situation, need to be prepared as soon as possible. On the same day, European Commission President Von der Leyen noted that Russia's pipeline gas supply to the EU has dropped from 40% to 7.5%, and the EU's gas reserves now stand at 90%, compared to 75% at the same time last year.

14:00 German real retail sales monthly rate in August

20:30 US September Non-Farm Payrolls

20:30 Canada September Unemployment Rate

22:00 New York Fed President Williams participates in a Q&A session at an event

23:00 Minneapolis Fed President Kashkari speaks on agriculture, food and inflation

Asian stocks declined on Friday, extending a global equity slide to a third day, as investors fretted over recession risks amid signs of further aggressive central bank policy tightening.

The dollar and Treasury yields remained elevated after multiple Federal Reserve officials continued to talk up additional rate hikes ahead of a crucial U.S. jobs report later in the day, while rising crude oil prices compounded concerns about prolonged inflation.

Japan's Nikkei dropped 0.7% as of 0130 GMT, pulling back from a two-week high reached on Thursday.

South Korea's Kospi slipped 0.33%, weighed partly by a decline in Samsung Electronics shares, after the technology giant flagged a worse-than-expected 32% drop in quarterly operating earnings. Australia's stock benchmark retreated 0.59%.

Hong Kong's Hang Seng was 1.17% lower in early trade, with its tech stocks tumbling 2.32%. Mainland shares remain closed for the final day of the Golden Week holiday.

MSCI's broadest index of Asia-Pacific shares declined 0.85%.

Meanwhile, U.S. emini S&P500 futures pointed 0.12% lower, after the index dropped 1% overnight.

Fed officials showed no intention of backing down from the most aggressive rate hike campaign in decades, with Fed Governor Lisa Cook, Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari all emphasising that the inflation fight was ongoing and they were not prepared to change course.

Stocks started the week on a strong footing, with the MSCI world equity index rallying 5.65% in the first two days amid speculation that the pace of central bank tightening might slow, but that has fizzled out since Wednesday.

Markets currently price an 85.5% chance of a 75-basis point increase for next month's Federal Open Market Committee meeting, and 14.5% odds for a half point bump.

Investors will now be looking to Friday's non-farm payrolls report for some clarity as to whether a steady diet of rate hikes has begun to take a bite out of hiring and wage inflation.

"Ongoing hawkish comments by Fed officials (are) a clear pushback on the 'Fed will pivot' narrative that has supported risk assets since the beginning of the week," said Tapas Strickland, head of market economics at National Australia Bank.

"Some positioning ahead of U.S. payrolls tonight is also probably a factor. Given the rally in risk assets earlier in the week, the pain trade would seem to be a 'good news is bad news' print."

The yield on the benchmark 10-year Treasury note was at 3.8297% in Tokyo trading, little changed from its New York close following a two-day rebound from a two-week low of 3.5620%.

The dollar index, which tracks the greenback versus a basket of six major peers, was little changed at 112.24 following a 1.84% two-day rally from a two-week low.

Sterling sagged near its lowest level this week, last changing hands at $1.1164, while the euro sank to the lowest since Monday at $0.9787.

Japan's yen weakened past 145 again overnight and fluctuated around that level in early Friday trading. Japanese authorities intervened to support their currency for the first time since 1998 on Sept. 22 following a break of the 145 level.

Crude oil on Friday continued the climb triggered by OPEC+ output cuts announced this week.

Brent crude futures rose 19 cents to $94.61 a barrel. WTI crude futures rose 24 cents to $88.69 a barrel, after earlier hitting $89.37 per barrel, the highest since Sept. 14.