Industrial metals, led by aluminum and copper, and the grains sector led by soybeans all surged higher before being disrupted by Thursday’s eyepopping US inflation print as it may dampen the outlook for demand. Aluminum hit a 13-year high with the most energy intensive metal to produce suffering supply cuts at a time when Chinese monetary easing and infrastructure spending pledges has supported demand. Copper, which has traded within the same range for the past ten months, made another breakout attempt only to be slapped down as the CPI print hit the screens.
Soybeans and corn traded higher but off their highs as weather worries in South America continue to support a tight supply outlook. Soybean's premium over corn reached the highest level since 2014 and with the US planting season approaching these developments could see farmers favor soybeans over corn, thereby inadvertently supporting the price of corn due to the risk of lower acreage leading to lower production during the coming season. Weather worries in Brazil supported a renewed rally in Arabica coffee with the futures price in New York reaching a fresh 11-year high. The latest move in response to a continued drop in ICE exchange monitored stocks to 1.03 million bags, the lowest level in 22 years.
As mentioned, US January CPI rose to the highest in 40 years, and the numbers jolted Fed expectations sharply higher for coming meetings and saw risk sentiment rolling over as the Fed is seen as needing to chase this development and show some credibility. With seven rate hikes now priced in over the coming 12 months, the latest inflation print suggest that the Fed remains so badly behind the curve that it must move aggressively to catch up with the inflation debacle that is unfolding and regain some credibility. Given that we are more than a month away from the next FOMC meeting on March 16th, some argue that the Fed may have to make a move ahead of the meeting – the first inter-meeting move for the purpose of tightening policy in modern memory.
With supply of many key commodities being as tight as they are, the prospect for higher prices remains but a flattening yield curve in US is being taken as a warning sign that the US economy, and several others that has been on a sugar high following the pandemic, are at risk of seeing an economic slowdown as central banks apply the brakes.
Into this period of uncertainty, we see continued demand for gold which despite an extended sell-off in US treasury bonds has managed to hold onto a second weekly gain. This week, ten-year yields punched past 2% with real yields rising to a fresh cycle high at -0.43%, up nearly 0.7% since the start of the year. However, the mentioned flattening of the yield curve suggests investors expect slowing growth into the oncoming rate hike cycle.