Commodities traded generally lower in a week where the big lines were drawn by developments in Washington and Moscow. At their latest FOMC meeting, the US Federal Reserve managed to surprise on the hawkish side of expectations after an expected 75-basis point rate hike was followed up by the removal of expectations for a cut in 2023. Changes that were made despite a significant lowering of the GDP forecast for this year and next as well as a sharp rise in the unemployment rate forecast, a signal the Fed is willing to continue hiking rates even if the economy deteriorates in order to get ahead of inflation.
These developments helped send the dollar and US Treasury yields sharply higher and with other major central banks also hiking, the recession fear took hold and helped send growth-sensitive commodities like cotton and copper sharply lower. However, at the same time, other commodities like gold, wheat, and diesel managed to find some support after President Putin escalated his flagging invasion of Ukraine, thereby adding a safe haven bid to gold while increasing supply risks of key commodities such as wheat, crude oil, and fuel products.
The Bloomberg Commodity Index traded lower by 2.5 per cent on the week troubled by tighter monetary policy hurting the growth outlook, weakness in China’s economy, and Europe’s energy crisis which has driven the region’s purchasing managers index to its lowest level since 2013. Losses being led by natural gas, cotton, crude oil, and industrial metals.
Multiple uncertainties will continue to create a volatile environment for most commodities ahead of the year end. While the recession drums will continue to bang ever louder, the sector is unlikely to suffer a major setback before picking up speed again during 2023. The latest FOMC action has brought the market one step closer to peak hawkishness, potentially sometime during the final quarter of 2022, and once that happens, a subsequent peak in the dollar and Treasury yields may reduce some of the recent headwinds.
Our forecast for stable to potentially even higher prices led by pockets of strength in key commodities across all three sectors of energy, metals, and agriculture is driven by sanctions, upstream cost inflation, adverse weather, and low investment appetite, and with that in mind, we see the Bloomberg Commodity Index, which tracks a basket of 24 major commodities, holding onto most of its year-to-date gains around 15 per cent for the remainder of the year.
The deteriorating global economic outlook can be seen through the continued collapse in the cost of shipping 40-foot containers around the world, especially on the major routes from China to Europe as well as the US East and West Coasts. The Drewry Composite Container Freight Global Benchmark rate slumped 10 per cent this past week to $4,472 per 40 feet box and the lowest since Dec 2020. Down 57 per cent from the September 21 peak but still three times higher than the pre-pandemic average, suggesting further downside as the global economy continues to lose steam. As mentioned, all the major China to US and EU routes have slumped while the transatlantic route to New York is holding up, potentially due to the euro weakness supporting exports to the US.
Crude oil meanwhile headed lower after spending most of the week confined to a relatively tight range with the Powell versus Putin battle (demand versus supply) not having a clear winner until Friday when both Brent and WTI dropped as the FOMC driven slump in risk appetite and growth angst was dialled up a notch as the dollar and yields continued to surge higher. A difficult and potentially volatile quarter awaits with multiple and contradictory uncertainties having their say in the direction. While the risk to growth is being priced in, the market has left it to another day to worry about the supply-reducing impact of an EU embargo on Russian oil and fuel as well as a part reversal of the US selling 180 million barrels from its Strategic Reserves.
Ole S Hansen, Head of Commodity Strategy, Saxo Bank