Using historic recession data as a guide, we see unemployment bottoms out months before a recession officially starts. A recession occurs because of an accumulation of interconnected factors including rising interest rates, a yield curve inversion, slowing GDP and a slowing stock market. (A yield curve inversion occurs when rates for short-term bonds exceed those for long-term bonds.) Unemployment in the United States has been holding in the 3.4-per-cent to 3.7-per-cent range since March of 2022, which corresponds to the period in which the Federal Reserve has raised rates from zero to 5 per cent.
The Federal Open Market Committee (FOMC) meets again July 26 and the bond market is predicting they will raise rates another quarter-percentage point (72 per cent likelihood). The last U.S. inflation reading we had, reported on June 13, 2023, was 4 per cent for the 12 months ending May 31, 2023, still two percentage points above the Fed’s target rate.
Let’s look at how some commodity prices have moved over the past month and their outlook in light of a potential recession.
The price of West Texas Intermediate (WTI) crude is trading at US$69 per barrel, down from US$82 in April and US$110 a year ago. For oil price forecasts I follow both Eric Nuttall of Ninepoint Partners LP and Jeff Currie of Goldman Sachs. Both are bullish long-term on the price of oil as they see demand being stronger for longer and supply being reduced because of underinvestment in the sector during the past few years. In mid-June, Goldman actually reduced their year-end target (for the second time this year) on the basis of increased supply from Russia, Venezuela and Iran, along with continuing recession fears and reduced Chinese demand, but they remained steadfast in their long-term outlook.
One year ago natural gas prices were approaching a decade high of US$10 per MMBtu (metric million British thermal unit). Natural gas prices have fallen over the past 12 months to currently sit at the US$2.75/MMBTU level, up from US$2/MMBtu in early June. Natural gas prices fell precipitously over the winter months because of a milder winter and inventory buildup that did not slow down field production. Summer weather causes increased demand for power generation for cooling, and so natural gas prices are starting to move up from their lows. The EIA (U.S. Energy Information Administration) sees prices averaging US$2.60/MMBtu until 2024, when they see prices moving back up to US$3.60/MMBtu based on inventory levels reverting to historic averages.
Lumber prices have been moving up recently because of a continuing housing supply deficit made worse by the lack of traditional supply from existing homeowners, who do not want to sell as they would have to refinance at much higher interest rates. Of note going forward, a new futures contract started trading in August of 2022 and the prior contract stopped trading in May. Changes for the new contract include origin, size, species and cost of transportation. Random-length lumber futures were historically reported for transportation from Western Canada (Prince George, B.C., specifically) and the contract was for 110,000 board feet (a railcar load) of Western tree species.
In the new format, lumber futures are reported to include an amount for transportation to Chicago, allow the inclusion of eastern SPF (spruce, pine, fir) and are for the amount of lumber in an average home construction at 27,500 board feet (about one truckload). The transportation provision appears to be in the range of US$100 per thousand board feet as shown by the spread between the contracts when both were trading.
The price of gold has dropped from its high of US$2,051 in early May to currently sit at around US$1,940. Further interest rate increase expectations and a stronger U.S. dollar have led to this drop in the price of gold. Gold rebounded somewhat over the weekend with the Wagner uprising in Russia.
Wheat futures are climbing again after Russia stated the Black Sea grain initiative would not be extended past its July 17 expiration date. The Black Sea grain initiative allows the passage of Ukrainian grain through the Black Sea to global markets. Ukraine exports 45 million tonnes of grain annually. Global wheat production is expected to reach 800 million tonnes (MMT) in 2023, an increase of 15 MMT over 2022 production levels. With more being planted in 2023, Canadian wheat production is forecast to be 35.8 MMT, the second highest level on record.
Commodity markets will to continue to be volatile through 2023 and into 2024 as this inflation/recession battle plays out.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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