Falling Commodity Prices Raise Hopes That Inflation Has Peaked in the USA
Oil, wheat, natural gas, lumber, corn and other raw materials ended a tumultuous quarter near or lower than March prices. Article by Ryan Dezember for the Wall Street Journal - July 4, 2022
A slide in all manner of raw-materials prices—corn, wheat, copper and more—is stirring hopes that a significant source of inflationary pressure might be starting to ease.
Natural-gas prices shot up more than 60% before falling back to close the quarter 3.9% lower. U.S. crude slipped from highs above $120 a barrel to end around $106. Wheat, corn and soybeans all wound up cheaper than they were at the end of March.
Cotton unraveled, losing more than a third of its price since early May. Benchmark prices for building materials copper and lumber dropped 22% and 31%, respectively, while a basket of industrial metals that trade in London had its worst quarter since the 2008 financial crisis.
Many raw materials remain historically high-price, to be sure. And there are matters of supply and demand behind the declines, from a fire at a Texas gas-export terminal to better crop-growing weather. Yet some investors are starting to view the reversals as a sign that the Federal Reserve’s efforts to slow the economy are reducing demand.
“Moderating commodity prices are clear evidence that inflation is cooling,” said Louis Navellier, chief investment officer at Reno, Nev., money manager Navellier & Associates.
Commodities have garnered extra interest on Wall Street, where investors are eyeing volatile raw-material markets to gauge inflation and have been investing in them to counteract the effect of rising prices on the rest of their portfolios.
Shares of commodity firms were among the few havens for investors during stocks’ worst first half in decades. Though they have slumped from highs notched earlier in the quarter, oil producers Exxon Mobil Corp. and Occidental Petroleum Corp. ended the first half up 40% and 103%, respectively. Fertilizer maker Mosaic Co. gained 20%. Grain trader Archer Daniels Midland Co. added 15%.
Investors this week will parse minutes from the Fed’s June 14-15 meeting, which are scheduled to be released Wednesday, seeking clues about the pace of interest-rate increases for the remainder of the year. The Fed is trying to tame the highest inflation since the early 1980s by reducing demand without tipping the economy into recession.
Traders and analysts say that some of the decline in commodity prices can be traced to the retreat of investors who piled into markets for fuel, metals and crops to hedge against inflation. JPMorgan Chase & Co. commodity strategist Tracey Allen said about $15 billion moved out of commodity futures markets during the week ended June 24. It was the fourth straight week of outflows and brought to about $125 billion the total that has been pulled from commodities this year, a seasonal record that tops even the exodus in 2020 as economies closed.
“I don’t know if the policies of the Fed have slowed the economy, but that’s what money managers are betting on,” said Craig Turner, commodities broker at StoneX Group Inc.
Much of the climb in prices was due to supply constraints following pandemic lockdowns, weather events last year that reduced harvests and sapped fuel reserves, and war in Europe. Those pressures have eased, though supply shocks are still jolting prices.
The Energy Information Administration said last week that U.S. oil output averaged 12.1 million barrels a day during the week ended June 24, the most since April 2020 when the economy was locking down and producers were shutting in wells.
Damage from a fire last month at one of the country’s largest exporters of liquefied natural gas has left more of the power-generation fuel and manufacturing feedstock for the domestic market and eased fears of winter shortages. Natural-gas inventories in the Lower 48 states are 12.5% below the five-year average for this time of year, down from a deficit of roughly 17% in March, the EIA said.
Improved growing weather in the U.S., Europe and Australia is raising hopes that bumper crops can make up for the wheat, corn and vegetable oil stranded in Ukraine since Russia invaded. Grain and oilseed prices shot up after the incursion but have fallen back to or below where they were before the late-February attack.
For the full article in pdf, please click here:
Christine Lagarde the President of the European Central Bank and Jerome H. Powell the Chair of the Board of Governors of the Federal Reserve System