If the global economy’s holding up — and I’ll readily admit to positing a bit of a straw man there considering most observers see a slowdown — someone forgot to tell crude. And just commodities more generally.
I don’t typically spend a lot of time editorializing around the mercurial behavior of the world’s most financialized commodity, but on Tuesday, Brent sank below $70.
That’s a meaningful development, particularly to the extent you trouble yourself with the psychology of “round” numbers and meaningless “thresholds.” (As a quick aside, in a world where almost all assets are subject to mechanical trading, these thresholds aren’t actually meaningless. And when you’re talking about oil, round numbers can take on extra significance in the event they’re coincident with strike prices on hedges.)
As the figure shows, oil’s in a tailspin, and so are commodities as an asset class. Bloomberg’s gauge this week fell through the August 2 lows to levels last seen three years ago. That, even with the dollar down ~4% since late-June.
Oil’s coming off an egregious weekly spill tied to ongoing growth worries for three of the world’s four largest economies — China’s mired in a deflationary quagmire, the US labor market’s softening fairly rapidly and Germany’s been stuck in a “slow-cession” for what feels like years — as well as oversupply concerns.
Do note: The distinction between growth worries and oversupply jitters is very often a false one. The “over” in “oversupply” is relative to demand, and demand’s just a synonym for growth.
In my opinion, oil’s a somewhat crude — sorry — gauge of growth sentiment. Like everything else in modern markets, it’s by now just another outlet for gambling. It’s worth noting that the net spec long (shown above) was the least bullish ever as of a week ago. The chart rolls up CFTC and ICE positions.
While some of the waning bullishness represents hedge funds’ “fundamental” view on the global growth outlook, crude prices have at various intervals been driven disproportionately by CTAs — i.e., “machines,” “robots,” “algos” or whatever quasi-derisive term you want to use. Bear that in mind.
A “cleaner” read on the situation might come from something like copper or iron. The latter’s down more than 30% and a gauge of industrial metals is off pretty sharply since May.
The “slippage” illustrated above is most assuredly down to growth concerns, and particularly China’s never-ending property crisis.
Anyway, the Fed should probably take a hint. This is demonstrably disinflationary. It’s obviously true that commodity prices can turn on a dime (or a nickel) but that’s probably just as good an argument as any for cuttin’ while the cuttin’s good, so to speak.
10-year breakevens were 2.03% late last week, the lowest since January 5, 2021.
Economy is slowing. Fomc’s chance to cut gradually left the building when they passed on the July cut. They would be really smart to cut 50 this go. If it’s overboard, just skip cutting the next meeting. Real rates are too high. Risk management suggests a 50 is correct. My last post on the subject suggested going 3/8 twice. That would work also.
I wonder, if one compiled past FOMC minutes, how often would commodity prices come up, and how often as something other than an inflation driver.
We have had a lot of good news on the inflation front, but looking forward, which is what we do…. how long will goods deflation last when shipping costs from china have skyrocketed? there’s a lag so next year downward pressure from goods prices will likely reverse. Energy prices have fallen dramatically, and while i see some more downside in the short term, next year crude is likely to be higher again. Rate cuts will only spur even higher house prices and so shelter inflation will be sticky. Population increase works both ways as well, it can ease wage growth, but there is a demand inflation element too from more people. Plus, more tariffs are coming, particularly in Trump wins. Are we really going to see sustained CPI inflation at 2%?!
One can still argue some cuts are coming to bring real rates down a bit, but, they are relative to the post-GFC vs. Pre-Covid anomaly, not versus historical norms. Some room, but not a lot. The market has kept on pricing in too many cuts and then reversing over the past couple of years and i suspect that is happening right now as well.
Nice work bringing important info to the attention of at least a few readers who probably pay little attention to commodities. Unfortunately, I doubt the Fed’s leaders are listening.