Many commodity prices—oil, wheat, and copper, for example—are sliding at the same time worries about a recession are growing.
A weaker economy would reduce, in theory, demand for some things. Copper, for instance, might very well be one of those commodities that falls out of favor. In a downturn, construction slows—copper is used in wiring and plumbing—and other industries make fewer things like electrical equipment, which also uses the metal.
Experts, however, differ on how long these price declines will last and how much they would cool inflation.
Edward Yardeni, president and chief investment strategist at Yardeni Research, told Barron’s that commodity prices offer a good read on the sentiment about the global economy.
“Right now they are definitely pointing towards weaker demand for commodities broadly, which could only be because global economic growth is slowing,” he added.
Helima Croft, head of global commodity strategy at RBC Capital Markets, echoed Yardeni.
“Fears of a global recession have become front and center, eclipsing the inflationary concerns,” she said.
For Croft, the softness in commodity price shows “real concerns about a hard landing and what that would mean for demand.”
Ryan Grabinski, investment strategist at research firm Strategas, expects demand for some metals “may end up being a little softer,” especially if building activity in China falls off. “But at the end of the day, the agricultural and energy commodity demand is still there” globally.
More Commodity Must-reads
The tougher call for Yardeni is on price—in no small part because of Russia’s war in Ukraine.
“You never want to be definitive about these things, because commodity prices can be quite volatile,” he said. “Certainly, the geopolitical situation remains in flux in a way that could lead to another surge, particularly in food and energy prices.”
Still, Yardeni does see signs of a peak in oil prices. In a note Friday, he pointed out that U.S. petroleum production has risen and that high prices are stalling—and blamed some of the increase in prices on the war.
Brent crude prices dropped about 3.5% last week and were down about 5.6% this month as of Friday’s close, according to FactSet.
Croft, however, argues that energy supplies remain tight: “We still have very, very thin spare capacity.”
The price drops aren’t across the board. The most actively traded wheat futures fell about 14% last week, but gold held up much better, losing less than 1%.
Then there’s the question of how much falling commodity prices might bring down inflation.
“The financial markets were clearly encouraged to see commodity prices peaking as a possible sign that they are real-time indicators of the outlook for inflation,” Yardeni said.
Last week, equities rallied. But the S&P 500 was down 0.3% on Monday and is on track to a bad first half, perhaps one of the worst in 50years.
Croft, though, is noncommittal, at least for now. “It’s too early to tell because we don’t know the duration of the pullback.”
A summary of the three major commodity categories this month:
Energy
Crude prices have softened, but, as measured by the most actively traded futures, were still some 25% off their all-time highs, according to FactSet.
The most active futures price for West Texas Intermediate, or WTI, has dropped roughly 5%, having rallied about 1% by midday on Monday. Brent crude was off by a similar amount.
Oil prices started to take off after Russia attacked Ukraine on Feb. 24. A big spike came in early March when the U.S. banned Russian oil imports.
“I don’t expect us to go back to 60-dollar oil anytime soon,” said Grabinski of Strategas. “If prices are not going to rise from here, they are at least going to stabilize at these more elevated levels.”
Metals
Comex Copper for June delivery had lost about 12% for the month through Friday, potentially signaling an economic slowdown.
Copper is “widely respect as an authoritative authority on the business cycle because it continues to be very sensitive to global economic activity,” Yardeni said.
Gold, meanwhile, has been trading sideways. Christopher Louney, a commodity strategist at RBC Capital Markets, said the range-bound trading reflects a tug of war.
On one hand, some market watchers see gold as a safe haven when consumer prices skyrocket. Others think the precious metal will inevitably go lower, pushed down by higher interest rates—the medicine that the Federal Reserve is prescribing to bring inflation under control—because of competition from higher-yielding investments.
“Most of gold’s long-term macro relationships do point to lower prices,” Louney said, adding that, for example, “a rising rate environment [is] typically bad for gold prices.”
Agriculture
Wheat prices have come under a lot of pressure lately, having lost about 10% through the first three weeks of June, based on the most actively traded futures. Ukraine is a major wheat producer and exporter; both growing the crop and selling it to other countries have been disrupted by the war.
“We see grain prices coming down, suggesting that the supply is maybe coming out of other routes than through the Black Sea,” Yardeni said.
The most actively traded live cattle futures prices have been steadier, up about 2% this month. But soybeans are off about 15% over that stretch.
Write to Lawrence C. Strauss at lawrence.strauss@barrons.com
