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

Foreign Exchange - Morning Commentary
Commodities on the Rise – Is Inflation Next?
Share this story:
Alan Rose
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.
  • 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. 
If we can help you with any Foreign Exchange needs, please email or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to Please do not reply to this email. To ensure the delivery of future emails, please add to your email address book or safe sender list.
Copyright ©2019 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC


Popular posts from this blog

Acquisitions or Alliances: What's Your Growth Strategy?