Recent aggressive rate hikes by Central banks across the world have raised the odds of a major policy error in the making that could inevitably lead to a slowdown in economic growth combined with unstoppable inflation.
Last month, the European Central Bank finally joined the global “Rate-Hike Club”, by delivering its first interest rate increase since 2011.
And they definitely did it in style, by surprising the market with a larger-than-expected 50 basis point hike, in an attempt to play catch-up with the rest of its peers.
A week later, the U.S Federal Reserve raised interest rates by another “super-sized” 75 basis points for the second month in a row – verging on its most aggressive cycle of monetary tightening since 1981.
And then on Thursday – the Bank of England followed in the ECB’s and Federal Reserve’s aggressive footsteps by unleashing its first “super-sized” interest-rate hike since 1995.
As traders know – every major central bank rate hike enviably pushes the global economy one step closer to a recession. Those odds increased last week with the International Monetary Fund warning that the worldwide race to raise interest rates poses a significant risk of a “double-dip” recession.
A double-dip occurs when two successive recessions happen relatively close to one another, and the second one happens because of compounded effects from the first.
The last time the global economy experienced a double-dip recession was in the 1980s.
Back in the early 1980’s, the global economy entered a short recession that lasted just six months, followed by a two-year downturn that stretched from the 1981 through to the fall of 1983.
According to Goldman Sachs, the parallels between then and now are strikingly identical.
A very short-lived recession in 2020, is now looking extremely likely to be followed by a severe and prolonged recession ahead.
If history has taught us anything, then the one thing that we do know for certain is both scenarios, whether that’s persistent Inflation or a Recession, ultimately present an extremely lucrative backdrop for commodity prices.
Looking ahead, more big moves could be on the horizon this week with inflation continuing to dominate and drive the markets.
The biggest macro events that traders will not want to miss out on include U.S Consumer Price Inflation and Producer Price Inflation data. Both readings come out prior to the Federal Reserve’s highly anticipated Jackson Hole meeting this month – and as always have the potential to move the markets significantly.
If both Inflation reading come out hotter-than-expected, that will intensify pressure on the Fed to respond with yet another “super-sized” 75 basis points rate hike or maybe even an “historic” 100 basis point rate hike at their upcoming policy meeting in September.
Whichever way you look at it, the case for commodities in a well-diversified portfolio has never been more obvious than it is right now!
Where are prices heading next? Watch The Commodity Report now, for my latest price forecasts and predictions: