Commodities Surge 12%, Outpace S&P with Inflation Concerns

Key Takeaway

• Commodities surge with S&P GSCI up 12% this year, outpacing S&P 500's 9.1%, driven by economic growth expectations in the U.S. and China.
• Rising commodity prices, including a 17% increase in oil and a 13% rise in gold to $2,332 an ounce, pose inflation risks that could hinder Fed rate cuts.
• Speculative trading and global demand forecasts push Brent crude past $90 a barrel and copper to $4.28 a pound, signaling robust economic health indicators.

Commodities Surge Challenges Fed's Rate Cut Plans

The S&P GSCI, a leading index of global commodities prices, has seen a 12% increase this year, outpacing the S&P 500's 9.1% rise. Notably, copper and oil have surged by more than 10% and 17%, respectively, with gold also hitting new records at a 13% increase to $2,332 a troy ounce. This rally, fueled by expectations of heightened demand from the U.S. and China, poses a potential challenge to the Federal Reserve's plans to cut interest rates later in the year. Francisco Blanch, head of global commodities and derivatives research at Bank of America, highlighted commodities as a key factor that could interfere with Fed cuts.

Economic Resilience Fuels Price Increases

Despite previous forecasts of a recession and the impacts of higher interest rates and China's slow recovery from COVID-era lockdowns, the U.S. economy has shown remarkable resilience. The Federal Reserve Bank of Atlanta recently adjusted its U.S. growth estimate for the first quarter up by 0.5% to 2.8%. This economic strength, coupled with drone attacks in Russia and conflict in the Middle East, has propelled Brent crude futures past $90 a barrel, their highest level since the aftermath of Hamas’s October attack on Israel. Similarly, copper prices have soared to their highest since June 2022, driven by a brightening economic outlook and speculative trading activities.

Inflation and Interest Rate Implications

The commodities rally and its impact on inflation complicate the Federal Reserve's strategy. With consumer-price inflation in the U.S. stuck at about 3%, above the Fed's target, rising fuel costs could further influence prices across various goods and services. This situation challenges central banks in the U.S. and Europe, where underlying inflation has either stopped falling or edged higher, weakening the case for rate cuts. Central bankers, including Fed governor Christopher Waller and ECB's Joachim Nagel, have expressed concerns over premature rate cuts, highlighting the tough "last mile" in achieving inflation targets.

Street Views

• Commodities Strategy team at (Neutral on global commodities):

  "Real income growth has sparked a reacceleration in global goods demand that is likely to propel commodity prices even higher."

• Francisco Blanch, Bank of America (Neutral on the impact of commodities on Fed's rate cuts):

  "Commodities are going to be potentially one factor that can interfere with Fed cuts."

• Bjarne Schieldrop, SEB (Bullish on crude oil prices):

  "A tight market and rising macro optimism is driving crude oil prices higher."

• Bob Elliott, Unlimited (Neutral on the role of hedge funds in commodities pricing):

  "The hedge fund positioning, being so short, is starting to get squeezed, which is then adding further upward movement in the price."