This analysis is by Bloomberg Intelligence Senior Macro Strategist Mike McGlone. It appeared first on the Bloomberg Terminal.
Commodities have a good reason to be down a lot at the end of May — sentiment got to bullish to the peak June 2022 — but it’s a question of how low prices will go until they stabilize. Other than short-covering rallies, we see few signs of catalysts until the Federal Reserve turns on the liquidity machine again.
Key bottom fishing risks – Fed-easing lag
Rising Fed rate-hike expectations may make a commodity bottom more elusive. The cat and mouse game between the rallying stock market and central-bank vigilance could represent a lose-lose for risk assets. It’s a question of how much lower for commodities and if the stock market rolls over, deflationary forces will gain fuel. Our graphic shows the Nasdaq 100 Stock Index approaching a 10% premium to its 100-week moving average on May 30 and Federal funds futures in one year (FF13) responding with higher rates.
The Bloomberg Commodity Index’s discount of about 10% to its 100-week mean is normal reversion from 2022’s pump, the greatest above this mean since 1980. A low plateau and lag to Fed easing is typical for a commodity bottom, yet sticky inflation metrics and rising equity prices are sustaining higher-rate headwinds.
Smart people and commodities vs. the Nasdaq
What’s normal for commodities — the higher-price cure — may trickle down to most risk assets as evidenced by the Fed still tightening in 2Q. Up only about 30% since the start of 2008 to May 30, the Bloomberg Commodity Spot Index appears on track to continue reverting toward unchanged from before the financial crisis and for good reason — the Fed hasn’t stopped tightening. Sticky inflation metrics and rising equity prices vs. plunging commodities may converge in 2H, when the Bloomberg Economics’ team expects an “ugly” environment.
Our graphic shows a potential headwind for most risk assets and commodities — a bit of reversion lower in the Nasdaq 100 Stock Index. Human innovation is a reason the tech-heavy index should outperform commodities long term, but rapidly rising rates are significant hurdles.
Is fossil-fuel deflation fueling gold inflation?
Up about 5% year over year to May 30, top performing gold vs. crude oil on the bottom of our macroeconomic scorecard suggests a global recessionary trajectory. Down almost 30%, the velocity of the Bloomberg Commodity Spot Index collapse has only been exceeded twice since 1960 — 1981 and 2009. Both periods involved long recessions and plenty of Fed easing before commodities stabilized. That liquidity is still being pulled from the system — evidenced by futures showing a more than 50% chance of another 25-bp rate hike at the June FOMC meeting — tilts our bias toward a severe economic reset.
Plunging commodities, US bank deposits and disappointing China recovery data is the current trajectory. What stops it is a key question and unless the stock market can stay strong and lift all boats, reversion risks are elevated.
Declining energy vs. rising precious metals
The if it goes up, it will continue doing so technical mantra in the Nasdaq 100 Stock index may be unsustainable vs. declining commodities, US bank deposits, Chinese equities and Fed tightening. With fundamental backing from deflating energy prices and the Shanghai Shenzhen CSI 300 Index giving up an 8% gain in January to being down about 1% for the year to May 30, one of the top performing commodities — gold — may be in the early days of increases. A key question is what stops the Bloomberg Industrial Metals Subindex from adding to its total return of about minus 20% and we see few sustainable buoyancy factors until the Fed starts turning on the liquidity.
Typical long and variable lags to most central banks still tightening tilts our bias toward more headwinds for broad commodities.
Bloomberg
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