Commodity Price Action in Q2 Says Inflation is Declining

Commodity Price Action in Q2 Says Inflation is Declining

The US Federal Reserve spent 2021 blaming rising commodity prices and soaring inflation on “transitory” pandemic-related factors. Late last year, the central bank had an epiphany, realizing that the economic condition was getting out of control.

The Fed has made addressing inflation its number one goal, but the war in Ukraine, sanctions on Russia, and Russian retaliation have caused supply-side economic pressures. The Fed has no tools to address the supply side issues but has pledged to continue to battle the highest inflation in four decades with short-term interest rate hikes and reducing its swollen balance sheet. Meanwhile, US GDP contracted in Q1 and will likely decline in Q2, signaling a recession. Tighter monetary policy to combat inflation while GDP is falling could be another example of the Fed’s chasing stale economic data with adverse results.

In Q2, stocks and bonds fell, and the US dollar rallied, putting pressure on the economy. Commodity prices turned in mixed results but posted an overall decline taking the pressure off inflation. A composite of the top commodity futures markets fell 6.27% in Q2 but was still 8.74% higher over the first half of 2022. Markets across all asset classes hate uncertainty. While the geopolitical landscape confuses investors and traders, the Fed’s policies reflect yesterday’s news and economic trends.

Stocks and bonds fall, and the dollar rises in Q2

• The NASDAQ fell 22.44% in Q2.
• The S&P 500 declined 16.45% in Q2.
• The DJIA dropped 11.25% in Q2.
• The US 30-Year Treasury bond futures contract fell 8.19% in Q2.
• The nearby US dollar index futures contract rose 6.21% in Q2.

Two commodity sectors post gains in Q2

• A composite of the energy sector commodities moved 6.77% higher in Q2.
• Animal proteins moved 3.31% higher in the second quarter.
• The other four sectors moved lower.

Four commodity sectors declined in Q2

• The composite of the base metals that trade on the LME fell 27.24% in Q2, making it the worst-performing sector in the commodities asset class.
• Precious metals fell 12.91% in Q2.
• Soft commodities declined 4.12% in the second quarter.
• The grains sector corrected 3.46% lower in Q2.

The demand versus the supply side issues in commodities tell a story

• Fed policies can impact the demand side of the economy.
• Rising interest rates and the strongest dollar in two decades are weighing on the demand for metals, minerals, and other commodities.
• Russia is a leading oil and gas producer and exporter.
• Russia and Ukraine are Europe’s breadbasket.
• The war in Ukraine has created supply issues for energy and agricultural commodities.
• Monetary policy can address demand-side economic issues.
• Supply-side problems are political issues beyond the scope of central bank policies.

Monetary policy requires a real-time, not stale, approach

• Many commodity prices have retreated in Q2 and early Q3, pushing inflationary pressures lower.
• The Fed called inflation a “transitory” pandemic-related issue throughout most of 2021.
• The highest CPI and PPI readings in four decades caused the Fed to pivot to a hawkish monetary policy path.
• The war in Ukraine created supply-side economic issues.
• Economic contraction threatens a recession.
• The Fed has not addressed the potential for a recession and continues to focus on inflation.
• The central bank was behind the inflationary curve in 2021 and is behind the recessionary curve in 2022.
• The Fed and other central banks are operating on stale data and may only be addressing the real-time economic challenges when it is too late.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!