The Growing Commodity Prices Risk

When the Federal Reserve raises rates for hopefully the last time at it’s upcoming meeting, there is a risk markets could be surprised by a rather staunch continuing tightening bias statement.

That the Fed will leave the door open to further rate hikes if necessary, citing it is glad to see headline inflation falling, but there remain real concerns for services and core inflation, could surprise some investors.

The Fed wants to defeat inflation quickly, not cautiously or slowly.

This is why we have seen the steepest hiking cycle in history. It must also be remembered that they were fighting to rectify their own wrongs in thinking this inflation cycle was transitory, and being a year late in beginning to hike.

The Fed, like the RBA, created a rollercoaster economy by over-responding to the pandemic. Measures were necessary, but it was the keeping of such measures in the face of the post-Covid boom for an extended period that has caused all the damage. As in overheated asset prices, now deflating, and an entirely artificial economic boom creating the hangover effect we are now experiencing.

Watch this space! Commodity prices are showing resurgence. Global oil prices are on a clearly upward trajectory now. Wheat is streaking higher as fears of supply reduction out of Ukraine and Russia grow.

As we have said before, it is important to recognise this is a significant European War that continues to have an impact on the mindset of Europeans, and at all times runs the risk of escalation. Suggesting, because there has not been a further major escalation, this means there isn’t going to be one, is a bit like saying a particular financial market has been stable for a while so is unlikely to get volatile? Of course, the exact opposite is true. Anything can happen any time.

For instance Russia not renewing the grain export treaty as it did not see the other side honouring its agreement regarding Russian grain exports. Then we have the Ukraine counter-offensive which is seemingly going nowhere, but with huge casualties on both sides. Under all this pressure you never know when something will snap and one side will act in a profoundly damaging manner.

It is not a pleasure to write about such things, but if you are trading markets you simply have to be aware, and not make the mistake of compartmentalising this war as if it will stay in its own turf and the rest of us can act like nothing is going on.

When no one else thought Russia would invade we told you two weeks before that they would and gave five reasons for our view. Now, unfortunately, please be aware that the situation is deteriorating as Ukraine and NATO become frustrated by their major offensive failing.

The supply of Western tanks to the battlefield has been no match for the pin point accuracy of Russian artillery and missile systems. The result of the months long offensive is that Ukraine has gained about 2.2 kms in one area and lost 1.6 kms on another part of the front.

This is a fierce conflict. I do apologise for saying, but you need to know. Inflationary forces have the ability to roar back at any time.

What this means, given internal extreme core inflation re-accelerating and uncertainties around commodity prices, is that the Federal Reserve will be adamant in maintaining a clear tightening bias until it sees a clearer trend develop in underlying inflation.

Market sentiment seems to be more attuned to the idea that this will be the last, with no risk of further hikes, and instead a belief in the fantasy economics of rate cuts.

The aberration in interest rates was that they were too low. Interest rates at current levels are the historic and for many the new normal. The sudden realisation of this permanency in high rates could trigger a further cautionary wave of portfolio adjustment. And it will come on the back of weaker earnings generally.

The US Stock market has really be going sideways all year, but the big names like Apple and Google have been tear always to the upside. Dragging the indices up with them. Main Street USA economic activity is not reflected in the global tech brand stocks, and so they distort the picture of whether these are really good times or not.

There is no breadth for this stock market rally and things have just begun to deteriorate again, as in higher prices for commodities.

It is time to be truly active with regard to your investment portfolio. Did tech stocks just peak for instance? The Nasdaq down 2% on the day. Could the EV boom be coming to an end as BMW and VW road test fleets of hydrogen vehicles? Has AI had its big run for the moment?

And all the while the US economy is stumbling.

Existing Home Sales just fell again and are at Covid-lockdown levels of activity.

The Philadelphia Fed Manufacturing Index contracted sharply again for the 11th month in a row.

How is any of this a cause for complacency. Be active as huge opportunities could soon emerge.

US Existing Home sales at the worst of lockdown levels.

Philadelphia Fed Manufacturing Index 11 straight months of serious contraction.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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