From Copper to Corn, Markets Show Peak Inflation Fear Has Passed
(Bloomberg) -- With investors anxious to hear the Federal Reserve’s latest take on inflation after last week’s hot reading, certain corners of the market are already simmering down.
Take lumber, one of the biggest gainers among commodities in the past year as stuck-at-home Americans poured money into remodeling. It’s slumped 40% since its peak in May. The booming housing market has also cooled, with an index that measures consumer plans to buy homes tumbling last month. And copper has eased from an all-time high.
The slowdown in price gains in some key inputs doesn’t mean the surge in headline inflation numbers is a false signal -- there remain numerous areas of the economy where supply constraints and torrid demand have left prices at multiyear highs. But for a central bank deciding whether and when to scale back policy assistance, some of the market signals offer reason to continue to be patient.
The Treasury market, for one, has shown itself unperturbed by the latest readings that highlighted the fastest year-over-year acceleration since 2008. Stocks haven’t minded either, with the S&P 500 breaking out to its first record since early May last week.
“Even though inflation metrics are high, the pressure is starting to come off and that leaves investors to say, ‘Gee, the Fed is right, the Fed knows what it’s doing, and we don’t have to worry about the Fed hiking rates too quickly or an inflation problem in this economy,’” said Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter.
And while the Treasury market’s signal remains a point of debate, with some investors citing technical pressures and a surge in demand after buying by foreign governments, other bond-derived inflation predictors have been declining as well. After reaching the highest levels in a decade, breakeven rates across tenors have slipped in recent weeks, dragging Treasury yields lower.
Here’s a sampling of what market-watchers are seeing:
Higher raw-material costs have been feeding concerns about inflation -- commodities have surged this year amid swelling demand and optimism about the global economic recovery. But investors have been reining in some of those bullish bets. Copper recently traded below $10,000 a ton, and the benchmark price for U.S. Midwest hot-rolled coil steel futures has been fairly stable since reaching an all-time high in May.
What we’re seeing in a lot of commodities is a peak in rising prices and a rolling over, which is a manifestation of more supply coming online, noted Art Hogan, chief strategist at National Securities.
“We’ve seen a short-term peak in a lot of those industrial materials that are important,” Hogan said by phone. “By definition, that’s transitory -- that just means at some point in time, that aggregate supply meets that aggregate demand.”
The Bloomberg Commodity Spot Index dropped Monday.
The housing market saw robust demand during the pandemic as more Americans looked to purchase new dwellings away from dense urban centers. Low mortgage rates also helped perpetuate the clamor for homes in less-populated areas. But there may be hints of a slowdown emerging, according to Gary Shilling, president of A. Gary Shilling & Co. Those include everything from the rising number of homes on the market to a drop in permits for new construction and consumers balking at high prices.
“The bubble is starting to leak,” Shilling wrote in a Bloomberg Opinion column last week. Though many Americans will likely continue to prefer homes away from larger cities, others will return to urban centers as the pandemic recedes. Meanwhile, a run-up in prices means affordability continues to be an issue, though high prices could spur supply in the form of new construction, he added.
Knock on Wood
Meanwhile, voracious demand for housing and a supply crunch have spurred a rally in lumber prices this year, one of the key contributors that made building a home in the U.S. more expensive than ever before. But there are signs of easing. Lumber futures continued to drop on Monday, extending their biggest-ever weekly slide. That’s happening as sawmills ramp up output and buyers hold off on purchases. Prices in Chicago fell roughly 18% last week, the largest decline for most-active futures in data going back to 1986.
“Shorter-term prices adapt to supply and demand conditions,” said Marc Odo, client portfolio manager at Swan Global Investments. “When you talk about commodities like agricultural products or lumber, those things can adjust.”
Crop Supply Worries
Extreme temperatures and a drought in Brazil helped ignite crop supply worries earlier this year.
But the outlook for better weather and a report on biofuel blending mandates from the Biden administration, among other factors, have helped prices reverse the recent rally. Corn has dropped near the lowest since mid-April and soybean prices have also slipped.
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