The disinflationary message evolving in commodities (and rates)

22 июн. 2022 г.

Fed Chair Jay Powell stole the limelight in his testimony to the Senate and despite all we’ve heard pricing for the July FOMC meeting hasn’t shifted – the markets expect a further 75bp of hikes. What we have seen is solid buying in the US treasury market (2yr USTs were -14bp), while commodity markets evolve to show greater signs of recessionary fears, with copper (-2.4%) and crude (-5.7%) getting strong attention. Falling commodities should be welcomed, as it breeds disinflationary pressures, however, this dynamic becomes far more bullish for equities if it’s driven by the perception of rising supply, not demand concerns, which seems to be the case now.

The message in commodity markets is a factor we’re seeing now in breakeven rates – or inflation expectations - where 2-year inflation expectation rates sit at 3.68%, having been as high as 4.97% in March, and the trend is now lower. It almost feels like yesterday was a defining session and the message we’re hearing now from commodities has to be on the radar, notably SpotCrude which is through its 100-day MA and April trend support - $100 is the call, where we could then head to $92 (the level crude sat before the Ukraine invasion). Go into the rates market and look at Eurodollar futures and see 40.5bp of cuts priced for 2023. What is clear is the market views a recession as increasingly likely, a view heard from Powell, who detailed that a recession was a possibility but not their intention.

Equities have held in well despite the falls in commodities, altogether there has been rotation into low-risk areas of the market and defensive sectors, with predictable outflows from energy and materials stock. Many question when we get consensus earnings downgrades, and as we look to the US 2Q earnings season (July), it feels just a matter of time before we see consensus earnings being chopped up. While this sounds negative, this needs to happen before I can think about calling a low in risk with any conviction, but the idea that when we see EPS revisions and central banks potentially sharing the same message the rates market and pivoting, is where I think we get a strong rally in growth equity, crypto and gold. We’re not there yet but it’s coming…