A Recession Is Coming. Here’s What That Means For Commodity Prices

Key Fundamentals for Commodities

The most highly antipated economic reports of this month, if not this quarter was released last Wednesday and showed Consumer Price Inflation in the U.S steadied for the first time in two years.

The Consumer Price Index, which measures the price of everyday consumer goods including fuel, groceries and rents – remained unchanged in the one-month period from June – largely due to the recent pullback in oil and energy prices.

However as traders know – one month’s data does not make a trend. And it certainly doesn’t mean an era of rapidly surging prices – or rate hikes – is over.

The biggest challenge currently faced by the Federal Reserve and its peers, which also happens to be out of their control – is oil and energy prices.

While energy prices may hold steady at current levels in the short term – a major problem for policymakers is that energy prices will enviably surge higher again, once the colder winter months kicks in – ultimately lifting inflationary pressures along with them.

With inflation running at a multi-decade high and likely to remain entrenched for the foreseeable future – the only plausible option left now is for policymakers to continue raising rates aggressively until they break inflation, but this may also come at the risk of breaking the economy.

Historically, every time we have had unemployment running below 4% and inflation running above 4%, the economy has experienced a recession, very soon after.

The recent yield curve inversion is just the latest signal that the global economy may be heading for a downturn. Inflation continues to surge at a red-hot pace even as Central Banks aggressively raise interest rates. GDP has now contracted for two consecutive quarters in a row – across some of the world’s largest economies, including the U.S, UK and Eurozone.

If history is anything to go by, then the one thing that we do know for certain is both scenarios, whether that’s persistent Inflation or a Recession, ultimately present an extremely lucrative backdrop for commodity prices.

Looking ahead, more big moves could be on the horizon this week with Inflation and Rate Hikes continuing to dominate and drive the markets.

Macro Data This Week

The biggest macro events that traders will not want to miss out on include the release of the Federal Reserve’s July Monetary Policy Meeting Minutes. Traders will be scrutinizing every word of the minutes for clues on the size of the Fed’s next rate hike.

Also on the radar this week will be the closely watched UK Inflation figures. In June, UK inflation hit a fresh 40-year high of 9.4%, significantly much higher than levels in the U.S and Eurozone.

With the Bank of England forecasting that inflation could top 15% later this year, it’s now a question of when and how soon – UK inflation will hit double digits.

Whichever way you look at it, the case for commodities in a well-diversified portfolio has never been more obvious than it is right now!

Commodity Price Forecast Video for the Week 15 – 19 August, 2022

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