Evening Brief – 05.02.24
Dr. Copper on Health of the Economy
The downtrend over the past two years in U.S. CPI from the 9.1% peak in June 2022 has made it look like the Federal Reserve would be successful in meeting its 2% target rate.
However, several sticky components of shelter and services have shown little indications of unwinding their inflationary impulses, and professional services have remained high as well. Now we attribute the pause in the downturn to medical, insurance, and education.
But what’s gaining more attention these days, as Connect Money noted in recent Evening Briefs, is the increased price pressure in the broader commodities market, particularly copper, and the possible consequences for future inflation.
The red metal is said to have a PhD in economics due to its ability to diagnose the health of the broader economy. As it stands, copper futures prices have been rallying sharply since late February, up 27% to $4.68 per pound, and only about 5% below their 2022 peak. The strength suggests economic strength, but potentially higher inflation.
As the world converts to cleaner energy, copper prices are rising due to supply constraints and increased demand. Some investment managers believe that copper has entered a new secular bull market.
Global hedge fund giant Man Group said last month that copper is “barreling towards a significant deficit and a price surge” in the coming years, with the metal playing a critical role in powering AI, renewable energy and electrical vehicles and meeting net-zero targets.
Copper prices are not the only commodities that are rallying. Soft commodities like cocoa and coffee are also witnessing parabolic gains. Although both commodities have come off the boil over the past two weeks, they are still near record highs. The Goldman Sachs Commodity Index, a gauge of the broader commodity sector, is up more than 15% since the middle of December 2023.
Coming into this year, it was widely assumed that a prolonged downturn in China and Europe, the world’s second and third largest economies, would keep commodity prices low, but this appears to be no longer the case.
The Federal Reserve is likely concerned about the price trends for copper and many other commodities and its implications for future inflation. The economy is expanding at a reasonable (non-recessionary) pace despite 11 previous rate hikes and several ongoing price increases. But, as the phrase goes, the cure for higher prices is higher prices.
If these commodity patterns persist, there will be a turning point where spending declines. However, it appears the stock market is adjusting expectations for interest rate cuts and “living” with the idea of elevated price pressures, embracing growth as an equally vital trigger for the bull market to continue.