Things Are Changing but This Trend Is Still Strong
Well, it’s been an interesting week to say the least.
On Friday, the US consumer price index (CPI) surprised markets by coming in at 8.6% over the last 12 months — the highest in 40 years. While shelter and food were high, the big culprit for the jump was fuel prices.
Stocks tumbled, bond yields rose, and cryptos plunged as it dawned on investors that inflation was, in fact, accelerating.
Now all eyes are on this week’s Fed meeting.
The expectation is that the Fed will turn more aggressive. Markets are already pricing in a 75 basis-point rise instead of the previously anticipated 50. But some punters expect a higher rate hike this week to 100 basis points, with more to come in future.
The big question is how high the Fed is willing to go to cool inflation.
The Fed is looking for that sweet spot where they raise rates just enough to cool it but also to avoid a crisis.
But as we’ve seen in economies around the world time and time again, controlling inflation isn’t that easy to do. Especially when so much money has been pumped into the system and signals are distorted.
Inflation is a hidden tax. It will damper spending…but it also causes consumers to look for alternatives.
High prices hitting consumers at the pump
US petrol prices hit a record of US$5 a gallon last week.
The rise in petrol prices has sent consumers on the hunt for alternatives…electric ones.
As Quartz reports, US Google searches for terms like ‘electric car’ and ‘EV’ (electric vehicles) were up in May:
‘Americans’ awareness of EVs has never been higher. Automakers are investing steeply in developing new lines of electric cars and trucks and advertising their electric models heavily, including in high-profile Super Bowl spots.
‘Broader consumer awareness is really significantly increasing, and when you add that to things like price shock at the pump, it really makes people consider [switching to an EV] and start to get more information about how going electric can reduce their total costs,’ said Peter Slowik, a senior researcher for EVs at the International Council on Clean Transportation.’
And higher oil prices are sparking more interest in EVs. They may have an initial higher price tag, but as we’ve mentioned before, they’re cheaper to own over their lifetime.
Of course, inflation could affect the EV story, but with commitments from governments, money pouring in, and inflation rising, we still think EVs are this year’s big investment story…and that commodities needed for EVs and the energy transition are one of the best places to be in.
Lithium prices remain high
Lithium is the crucial material for the energy transition.
Oil bulls may be gloating about oil prices hitting a 70% gain in the last year, but the truth is that lithium has done much better in 2021 — and even this year so far.
According to Benchmark Minerals, lithium carbonate prices are up 385% in the last 12 months and 115% since the beginning of the year.
Lithium stocks have cooled with Goldman publishing a note saying that the battery metals bull market is ‘over for now.’
But Goldman’s isn’t the only view out there…
In fact, Benchmark Minerals recently released a rebuttal to Goldman’s note as they felt the report ‘sent incorrect signals to the market’.
Benchmark expects the lithium shortage will last till 2025. As they noted:
‘The lithium market will balance over the next few years, but it’s unlikely that an unprecedented ramp-up of marginal, unconventional feedstock will fill the deficit. It is also unlikely that demand will weaken significantly.
‘It will be a touch-and-go market balance; but there will not be the structural oversupply that Goldman Sachs is predicting.
‘As the market wrestles between long-term supply security to fuel the lithium ion economy, and increasingly market-led pricing mechanisms to incentivise supply growth, the era of lithium market volatility is likely just beginning.’
While the mood out there may be changing, the energy transition investment case hasn’t.
If anything, with higher energy prices calling for more energy security, it’s only growing stronger.
Until next week,
For Money Morning
Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.