Inflation continues to rise, the U.S. Federal Reserve is hiking interest rates, and commodity prices are starting to stabilize, albeit at much higher levels than their averages of the past five years. What is the outlook in this environment?
According to Tradingeconomics.com, as of the market’s opening on Monday, over the past four weeks oil has moved up 0.8 per cent, natural gas down 2.5 per cent, gasoline up 17.6 per cent, gold down 9 per cent, silver down 18.3 per cent, copper down 13.1 per cent, base metals (zinc, lead, tin, aluminum) all down 13.5 per cent to 22.5 per cent, corn down 1.3 per cent, wheat up 8.7 per cent, soybeans down 2 per cent and livestock (cattle, hogs) down 3.2 per cent and 15 per cent respectively.
The message: Energy and some agricultural commodities continue to rise whereas most others have fallen. The latest U.S. inflation numbers (Consumer Price Index data), reported on May 11, were higher than expected at 8.3 per cent although there is a growing consensus inflation is peaking.
What’s been happening recently?
The European Commission last week proposed a phased embargo on Russian oil, and Japan then confirmed it would do the same. The European embargo requires unanimous support, with Hungary being a holdout so far. Secondly, gas flow to Europe through Ukraine has been disrupted by 25 per cent because of the presence of Russian troops on a major transit route.
Closer to home we see gasoline prices range from $1.68 to $1.90 a litre in the Prairie provinces to at or above $2 elsewhere across Canada. Prices are expected to remain high as we begin summer driving season. The COVID-19 lockdowns of the past couple of years have given us a desire to get out but it looks like gas prices will keep the trips closer to home.
Both base and precious metals have fallen over the past month because of rising rates, anticipation of a slowdown in the economy, and COVID-19 lockdowns in China reducing economic output there. Slowdowns in China especially affect the price of copper, given the country is the largest copper consumer globally. In inflationary times, gold and other precious metals rise as safe-haven investments but they are being put under pressure by rising interest rates. Gold gets caught between these two forces as inflation rises and the Fed raises rates to combat it.
Agriculture prices are mixed over the past month with wheat continuing to rise in price. The Ukraine supplies 11 per cent of the world’s wheat, with Russia adding another 17 per cent. India is the second-largest producer of wheat globally behind China, and the heat wave through India and Pakistan is having a direct impact on wheat crop production, with a forecasted drop of 6 per cent compared to last year’s production. India announced on May 13 it will be curtailing wheat exports for the immediate future.
Livestock prices have fallen off some in the past four weeks but remain high. Livestock prices are directly influenced by the underlying price of feed (corn, soy) and transportation, which is affected by energy prices.
On a final note, there are now five million more job openings in the United States that unemployed people. This imbalance inevitably leads to wage inflation as employees move to higher paying jobs or employers raise wages to keep existing staff, or both. As always, there is a potential counterforce here if the economy is slowing or heading to recession.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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