Global Economy & Markets Weekly Roundup 11/05/21
Metals, energy and agricultural commodity prices are increasing, leading inflation expectations higher
Key Takeaways
Commodities have increased significantly, recording all time or multi-year highs. Supply bottlenecks and strong demand, as more economies and sectors move toward reopening, have lifted prices across the board.
Copper prices have surpassed $10k per tonne for the first time in ten years. Being a key element for building electric vehicle batteries and for electrical wiring in microprocessors, copper has found support, inter alia, by political aims to bolster the green economy.
President Biden’s “American Jobs Plan” of $2.25 trillion, includes an $174 billion investment to enhance the domestic Electric Vehicle (EV) market. Main goals are: (i) to hasten domestic supply chains; (ii) retool factories to compete globally and; (iii) support domestic workers to make batteries and EVs. Moreover, it will provide consumers with tax incentives to buy US-made EVs.
Prices in other industrial metals markets like those of Aluminum and Zinc have followed suit, whereas Agricultural prices, mainly Corn and soybeans, have jumped due to unfavorable weather conditions in South America. Finally, oil prices have increased by circa 30% year-to-date amid conservative supply (OPEC) and increasing demand.
Commodity prices have driven market-based inflation expectations significantly higher. Specifically, the US 10-Year breakeven inflation rate, i.e. the rate of inflation at which Treasury inflation-protected securities and nominal Treasury securities with equal maturities will yield the same return, has increased to an eight year high of 2.5%.
On the other hand, nominal US 10-Year interest rates have oscillated in a tight 1.50%-1.60% interval, as the Federal Reserve remains the dominant buyer via purchases of $80 billion per month, keeping a lid on nominal rates.
In the short-term, conflicting signals from the US labor market suggest a lower likelihood that the tapering conversation of large-scale asset purchases will begin in the June 16th FOMC meeting.
However, as domestic demand exceeds its pre Covid-19 trend in H2:2021 and the labor market continues to recover, the Federal Reserve is expected to slow down its bond purchases as a first line of defense against: (i) rising vulnerabilities associated with elevated risk appetite and; (ii) inflationary pressures. Thus, US Treasury nominal bond yields could edge higher.
As the global economic outlook improves, the amount of incremental monetary stimulus will be adjusted too. The Bank of Canada, decided in April to lower its QE program to a target of $3 billion net purchases of Government bonds per week, from a minimum of $4 billion.
Headline equity indices have remained broadly unchanged in the fortnight, albeit with Energy (+13%), Banks (+7%) and Industrials (+5%) over-performing by a wide margin since our last Roundup two weeks ago. The Technology sold off (-5%), as negative-correlated returns to inflation expectations, weigh significantly. Note that US CPI is due on May 12th (+3.6% yoy from +2.6% yoy).