Inflation continues to rise, commodity prices are starting to stabilize or fall, and the U.S. Federal Reserve has stated a recession is “certainly a possibility.” Where is the economy heading in this environment?
According to Tradingeconomics.com, as of market open on June 27, over the past four weeks the prices of oil, gasoline, precious metals, corn and soy have been flat to down marginally whereas base metals (copper, zinc, lead, aluminum, tin, nickel) are down 10 to 20 per cent, natural gas has declined 31 per cent, wheat and canola are down 20 to 25 per cent and livestock prices (cattle, hogs, poultry) up marginally (2 to 3 per cent).
What’s been happening recently?
The factors causing these swings in commodity prices include inflation, fear of recession, lockdowns in China and the rising Fed funds rate. Let’s look at some of these factors.
Jerome Powell, the Fed chair, said last week the central bank was not trying to engineer a recession in the United States to stop inflation, but was fully committed to bringing prices under control, even if doing so risks an economic downturn.
We are certainly seeing the effect with drops in the financial markets, but U.S. consumer confidence is also starting to waver, as shown by auto and home sales. U.S vehicle sales fell 12.6 per cent month-on-month in May, pulling back to 12.7 million (seasonally adjusted annual rate) units (from 14.5 million in April and a consensus forecast of 13.7 million units). Existing home sales in the U.S. declined by 3.4 per cent to a seasonally adjusted annual rate of 5.41 million in May, the lowest since June, 2020.
Notable in commodities markets, Freeport LNG said volumes from its Texas export terminal could be hampered until late this year following an explosion on June 8 at the terminal. The development is likely to enable utilities to put liquid natural gas that was destined for export into storage for next winter, alleviating domestic supply concerns. While natural gas prices in North America dropped 20 per cent on the news, the expected delay in U.S. LNG exports caused a significant ripple in Europe, which is already dealing with major supply constraints. Prices there are now up, month over month, as much as 40 per cent.
Base metals have been dropping owing to lockdowns in China, increasing interest rates and demand weakening because of fears of a recession. We see a broad group of base metals down 10 per cent to 20 per cent over the past month, indicating they are all pulling back for similar reasons. Copper has always been viewed as a leading economic indicator and falling copper prices (after a peak in April, see chart) point to a slowing economy. We expect the downward monthly trend to continue in June based on recent copper prices.
Oil and gasoline prices have been flat over the last month, but predictions endure that the price of oil (and gasoline) will remain high owing to Russia’s invasion of Ukraine, falling rig counts, reduced refinery capacity and an industry that is not convinced it should deploy capital into a longer-term trend of greener energy.
Wheat prices are now close to their post-invasion low as winter wheat harvesting in North America and Europe and expectations of a large crop from Russia are set to ease supply concerns. As a result of the war, Ukraine will see 35 per cent less wheat harvested this year compared with 2021. Countries such as Egypt, Turkey and Syria that relied on Ukrainian shipments are increasing their purchases of Russian wheat amid concerns over rising costs and risk of famine.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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