Morning Commentary: Commodities on the Rise – Is Inflation Next?

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Commodities on the Rise – Is Inflation Next? Share this story: Alan Rose Foreign Exchange Senior Trader

Global equities continue to soar, buoyed by the culmination of a Phase 1 trade deal between the U.S. and China and reduced tariffs. A recent by-product of all the euphoria regarding U.S. and global equities has been a gradual rise in U.S. and G7 interest rates as the global economy appears to be getting a second wind. Commodity prices have generally been in a downtrend all year long, reflecting the economic reality of a U.S. and global economic slowdown. But over the last month commodity prices, and in particular copper prices, have been rising in reflection of this new optimism.  Copper prices are often seen as a bellwether for economic growth as they reflect demand for home building and other industrial outputs.  According to Jeffrey Gundlach, DoubleLine Capital’s chief executive and the new Bond King, the ratio between gold and copper has been a powerful signal and an excellent short term predictor of where U.S. Treasury yields are headed. With the recent sharp rise in copper prices, he believes higher inflation and higher interest rates are potentially just around the corner. Markets have succumbed to the belief that inflation remains dormant and that central banks will continue to remain solidly in the dovish camp. Gundlach’s prediction flows counter to what many in the market are calling for with Citibank and Soc Gen predicting a much lower U.S. 10-year yield (~1.25% vs. ~1.90% currently) next year.  Higher inflation indices, along with higher short and medium term U.S. interest rates, could cause a reset in thinking regarding inflationary expectations, equities, commodity prices, the U.S. dollar (DXY) and central bank’s dovish bias toward inflation…this will bear watching going forward into 2020. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: The German IFO business survey index came in well above expectations supporting the narrative of optimism and a recovery in the German economy for next year. There was a brief rally in the euro on the news before it fell back into the middle of the overnight trading range. The British pound (GBP) has given up all its gains and more after the outsized Tory victory on December 12th with the GBP falling nearly 2% over the past 48 hours. As we highlighted yesterday, PM Boris Johnson is changing the law to ensure that the Brexit transition phase is not extended, making the prospects of concluding a trade deal with the EZ within one year unlikely. While many see this as a negotiating tactic, it does reintroduce the prospects and risks of a potential hard Brexit. Markets were taken back by the announcement as they were too long GBP and it appears we are headed for more political maneuvering, leverage positioning and uncertainty in the short term.

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