Opening Statement from the June 2019 CCPM Forecaster
Originally published on June 2, 2019
The global economy continues to feel the adverse impact of trade uncertainty. This dynamic has been reflected in the price of commodities. Meanwhile, although the U.S. economy remains relatively strong momentum has been waning for a number of months.
Given the recommendations from within the May 2019 issue of the CCPM Forecaster, we are not at all surprised that many of the commodities we cover encountered sharp price reversals. But we generally would not treat rallies in select commodities as an accurate reflection of the longer-term trend. We believe many commodities were oversold over the short term, so the recent rally was merely a response to this.
Finally, low U.S. Treasury yields continue to pose a significant concern. With the effective federal funds rate currently at 2.42 percent, it is of no surprise that the yield on 3-month U.S. Treasury bills is 2.38 percent (as of May 31). In contrast, the 10-year U.S. Treasury Note is yielding a mere 2.14 percent (as of May 31). Therefore, investors receive a higher rate of return in addition to lower risk if they purchase 3-month T-Bills versus 10-year Treasury Notes. This phenomenon is often referred to as an inverted yield curve, although other maturities are used when analyzing this curve.
As we have mentioned in the past, the fact that the yield curve has inverted should not be taken to be particularly significant by itself, given the large and unknown distortions in asset pricing as a result of radical monetary policy actions of the past decade. Regardless, the persistently low yield seen in the 10-year Treasury remains of great concern for a variety of reasons.
As expected, crude oil sold off once geopolitical factors responsible for driving pricing beyond reasonable values faded. Crude oil is now being priced according to supply-demand expectations which are bearish. Although Brent and WTI crude have sold off back down to the trading range we previously defined based solely on macroeconomic dynamics, there’s a good possibility that pricing will head lower over the short term. It should be noted that the price behavior of crude oil has mirrored our forecasts with the highest of precision for quite some time.
As forecast, gold pricing finally broke out...
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