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What Does The Most Aggressive Tightening Cycle In Decades Mean For Commodity Prices?

By:
Phil Carr
Published: May 9, 2022, 12:58 UTC

The second quarter of 2022 has been monumental for monetary policy as governments and central bankers across the world ramp up the fight against scorching inflation.

What Does The Most Aggressive Tightening Cycle In Decades Mean For Commodity Prices?

In this article:

Commodity Markets Fundamental Analysis

Central bankers and governments acknowledge that inflationary pressures could persist for years, driven in part by the on-going Russia-Ukraine war, lockdowns in China and soaring energy prices.

In the U.S, inflation is rising at its fastest pace in 41-years. In China and Japan, inflation is shattering records. While in many other economies, including the UK, Canada and Europe inflation is at its highest level in over 30-years and still accelerating.

If inflation continues to surge at the current pace across the world, then we’re only months away from a return to double-digit inflation on the same scale last seen in the 1970s.

To regain credibility, central banks across the world have come under pressure to move more aggressively on rate hikes, which ultimately means, Stagflation is now a major risk to the economy in the second half of the year, or worst still a recession.

Last week, the Federal Reserve executed their biggest interest rate hike in 22 years with a 50-basis point increase.

This is the first time since 2006 that the Fed has implemented rate increases at back-to-back meetings as rapidly surging inflationary pressures and the cost of living crisis continues to worsen.

Elsewhere, The Bank of England also followed in the Fed’s footsteps by raising interest rates to their highest level in 13 years.

Both the Fed and Bank of England have signalled they will follow up with more aggressive hikes of the same size at their upcoming meetings.

Historically, 11 of the last 14 major central bank tightening cycles since World War II have been followed by a recession within the next 12 months.

Will that be the same again this time around?

Only time will tell, however one thing we do know for certain is that global equity markets tend to crash once central banks begins their tightening cycle. This inversely presents huge bullish tailwinds for Commodities as they are viewed as one of the most reliable hedges against economic risk, inflation and recession.

Already within the first 4 month of 2022 – a total 27 Commodities ranging from the metals, energies to soft commodities have tallied up astronomical double to triple digit gains.

And this is just the beginning!

To quote Goldman Sachs, “they have never seen the Commodities markets this bullish before”.

Commodity Price Forecasts for the Week 9-13 May 2022

Where are prices heading next? Watch The Commodity Report now, for my latest price forecasts and predictions:

For a look at all of today’s economic events, check out our economic calendar.

About the Author

Phil Carrcontributor

Phil Carr is co-founder and the Head of Trading at The Gold & Silver Club, an international Commodities Trading, Research and Data-Intelligence firm.

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