Source: Golden Ten Data

A new round of “big bulls” has made the path of central banks to fight inflation more complicated, and may make the prospects for sharp interest rate cuts in the short term even more bleak.

Crude oil prices had risen sharply this year even before Iran's attack on Israel last weekend raised market concerns about wider regional wars and disruptions in oil supplies. This progress, along with a renewed boom in the precious metals and other raw materials markets, has pushed the Bloomberg Commodity Spot Index to a nearly seven-month high.

The rise in oil prices has led to a rise in gasoline prices in the US. In the US, gasoline prices are a hot political issue, especially during the election year. Copper is an important raw material for wires, pipelines, and industrial machinery. Currently, copper prices have reached a mid-term high in 2022. The price of coffee also rose sharply this year, and the price of cocoa soared to a record high, causing chaos in the chocolate industry.

Last week, the US core CPI rose more than expected, delaying market expectations for the Fed to cut interest rates. The two biggest drivers are gasoline and electricity prices.

Trevor Woods, chief investment officer of Northern Trace Capital LLC, said, “Recent gains have made it more difficult for central banks to relax interest rates.” The company overmade several commodities.

Investors are re-entering ETFs that track commodity indices. According to data compiled by foreign media, since the beginning of March, the 20 largest and broad-based commodity ETFs have attracted about 1 billion US dollars in capital. Meanwhile, investors who fled commodities in late 2023 are now scrambling to return.

“Higher-than-expected inflation is a major reason for capital inflows into commodities, which has boosted investors' demand to hedge their portfolios,” said Ryan Fitzmaurice, senior commodity strategist at Marex. “Considering recent CPI data, I wouldn't be surprised that the market is turning back to commodities.”

The rise in raw material prices will fuel inflation and is likely to continue for a longer period of time.

As the world's largest and most important commodity market, oil prices have risen this year against the backdrop of the escalating conflict in the Middle East, where demand is higher than expected, and supply is flat. Last week, the price of Brent crude oil surpassed $92 per barrel for the first time since October last year.

Industrial metals, which play an important role in electric vehicles and data centers, are also playing a role. But so far this year, there is no commodity that can compare to the increase in cocoa: the increase in cocoa has more than doubled, which has caused candy makers to reduce packaging, and chocolate lovers have prepared for the worst.

Overall, this all adds up to a higher price for consumers. Pacific Investment Management (PIMCO) recently warned that the Federal Reserve may restart interest rate hikes if inflation continues to heat up. The market currently expects the federal funds rate to be around 4.9% by the end of this year, while the market forecast at the beginning of this year was 3.8%.

By contrast, the price of gold is hitting new highs almost every day, as concerns about inflationary pressures increase, prompting investors to turn to safe-haven assets.

The market's renewed interest in investing in commodities is reflected in part in the total value of commodity derivatives contracts held by traders. By the end of March, the figure had climbed to a seven-month high of $1.35 trillion, according to J.P. Morgan Chase data.

J.D. Joyce, president of Joyce Wealth Management LLC, said, “The Federal Reserve may slowly relax interest rates. If interest rates stay high for a longer period of time, we may see other central banks around the world cut interest rates before the Federal Reserve.”

Of course, not all commodities are rising. Gas prices in the US have been so low that some producers have shut down oil wells. With the exception of cocoa, many agricultural markets weakened due to adequate supply prospects, which meant that global food prices faced less risk.

Even if the tension in the Middle East continues to escalate, it is uncertain whether oil prices can rise further. Despite Iran firing more than 300 missiles and drones at Israel, the price of Brent crude oil even fell during the Asian session on Monday.

Goldman Sachs analysts said in a report last Sunday that “oil producers decide to hedge price risks and sell their production ahead of time, which may curb the rise in oil prices due to rising geopolitical risks.”

How long will the current commodity rally last? Although Macquarie Group analysts last month thought commodities were “entering the bull market,” most observers didn't see this as the beginning of another supercycle.

If the input price is too high, it will eventually dampen consumer demand for the manufactured product. Any kind of economic slowdown due to inflation is bad news for Biden because he is trying to convince voters that he managed the economy well during his time in the White House. Rebecca Babin, senior energy trader at CIBC Private Wealth, said:

“Commodities are important inputs to many industries, and if price increases are not passed on to consumers, this will begin to hurt economic growth.”

Editor/jayden