Introduction:
Commodity prices are moving in different directions and the U.S. Federal Reserve continues to raise rates to combat inflation. How will this play out?
Tracking commodities:
Since the peak in June, commodity indexes have dropped about 20 per cent, with the most recent bottom in mid-July. According to Tradingeconomics.com, in the four weeks to the market open on Aug. 8, the price of oil and gasoline are down almost 15 per cent, yet natural gas has jumped 25 per cent. Precious metals (gold, silver, platinum and palladium) are flat to up 8 per cent and base metals (copper, zinc, nickel and lead) are up 2 per cent to 15 per cent. In agriculture, soybeans have gained 5 per cent, while wheat has dropped 10 per cent, corn is down 5 per cent and lumber is down almost 25 per cent. Livestock prices are flat to slightly up, while eggs have jumped 7.5 per cent. Over all, both the Commodity Research Bureau Index and the London Metal Exchange index have increased 3 per cent to 5 per cent in the past month.
If we look at the Goldman Sachs Commodity Index over the past 12 months we see two peaks, first in early March, corresponding with the outbreak of war in Ukraine, and again in early June, driven by oil prices.
What’s been happening recently?
Fed policy continues to drive the economy. The relationship between interest rates and inflation is very dynamic right now. The current federal funds target range (FFR) is 2.25 per cent to 2.5 per cent after the 75-basis-point rise on July 27. Prior to Friday’s U.S. jobs report, the effective FFR midpoint for 2023 was 3.3 per cent, a drop of 20 basis points from the previous month. That drop implied the market expected rate hikes to end sometime this fall with two more 50-point hikes to come. We need to read between the lines a bit here but that also implied inflation will peak soon and start to fall. Some analysts believe the Fed will start to cut rates again in 2023.
The U.S. jobs number reported on Friday was up 528,000, resulting in 3.5-per-cent unemployment. That jobs increase immediately caused money markets to price in even higher Fed rate hikes this fall, perhaps by as much as an additional 1.5 percentage points, instead of one percentage point. This is a very dynamic and moving economic system, which has a direct impact on commodities.
Specifically for commodities:
Oil is now below the price it traded at prior to Russia’s invasion of Ukraine, driven in large part by recession fears. U.S. crude inventories are climbing, as is global production. Predictions remain that the longer-term price of oil will continue to be elevated owing to falling rig counts, reduced refinery capacity and limited spare capacity.
Lumber futures have dropped 25 per cent over the past month as the housing market shows signs of slowing in the face of rising rates and economic pessimism, along with seasonal and maintenance downtime at sawmills. New home sales in the United States tumbled to their lowest level since April, 2020. Morningstar expects housing starts to fall 10 per cent in both 2023 and 2024.
With 16 other ships ready to depart, the Razoni, a cargo ship loaded with 26,527 tonnes of corn, left the port of Odessa in Ukraine on Aug. 1 destined for Lebanon. Assuming it can proceed with its export plans, Ukraine will be able to move more than 20 million tonnes of grain reported to be in its port silos, thereby allowing space for this fall’s harvest. Futures prices for grains traded down on that news and are expected to remain below peak levels owing to reduced demand. With rising yields for this year’s spring wheat crop, global wheat exports are projected to be 205.5 million tonnes this year compared with 200.1 million tonnes in 2021/22. With all the ebbs and flows we have seen in the price of wheat, it is now up 8 per cent from this time last year, in line with the increase in CPI, and back to preinvasion prices.
With this backdrop of rising rates, reduced demand, slowing inflation and weakening consumer confidence, we expect further softness in commodity prices for the balance of 2022.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.