Opening Statement from the September 2022 CCPM Forecaster
Originally published on September 4, 2022
Overview
Pricing of most commodities have eased from highs made in recent months primarily due to aggressive interest rate hikes by central banks led by the US Federal Reserve. In some cases, demand destruction has also played a role in these price declines.
China continues to face a very harsh economic downturn which has added downward pressure in commodities pricing. Meanwhile, weakness in Europe has also served as a downward force on commodities pricing aside from oil and gas.
As the global economy continues to weaken, we expect commodities pricing to trend downward. But the possibility of further price shocks to certain commodities as a result of geopolitical events cannot be ruled out. Already copper pricing is consistent with the pattern of global economic weakness.
August Employment Report
The August employment report (released on September 2) was mixed. On the one hand, the Establishment Survey posted 315,000 new jobs, reflecting a strong job market and thus upward pressure on inflation.
On the other hand, the Household Survey posted a 0.2% increase in the unemployment rate to 3.7% as the number of unemployed persons increased by 344,000 to 6 million.
Meanwhile, the prior two months of jobs numbers were revised down by 107,000 pushing the three-month average jobs gain of 375,000. This is still a strong number and indicates a strong labor market.
Total jobs are now at 240,000 above the pre-pandemic level, with private sector jobs at 885,000 higher (public sector job growth has lagged).
The average work week declined by 0.1 hours pointing to reduced demand for labor and thus a downward force on wage inflation.
As well, the average hourly wage increased by only 0.3% in August. Over the past three months the annual rate of increase in hourly wages stands at 4.9%. This is considerably lower than the 6.1% rate posted at the end of 2021, but it’s still quite high.
Gold & Silver
As expected, gold and silver pricing continue to exhibit weakness due to rising interest rates and the strong dollar. Despite inflation at 40-year highs, gold pricing has trended downward. This is something that has been ignored by those who believe gold to be an inflation hedge (most investors).
In 2006 (America’s Financial Apocalypse) I first explained that gold is not an inflation hedge, but rather more of a hedge against deflation. Yet, the majority of investors have been led to believe that gold is an inflation hedge despite evidence pointing to the contrary.
If in fact gold is a hedge against inflation one would expect pricing to perform very well during extended periods of high inflation. Today we see the opposite relationship during the highest inflation in more than forty years.
As well, it is important to point out that although gold price performance has somewhat of a negative correlation to the stock market, gold pricing has been in decline ever since the selloff in the stock market began in early 2022.
We believe gold pricing has shadowed the decline in the stock market because of rising interest rates. While gold and stock prices will not always decline when rates are rising, this relationship is more likely when rates are expected to rise significantly over a longer time frame.
This relationship also has to do with expectations. For instance, if investors are caught off guard by a series of rate hikes, gold and stock prices may not post the types of declines to be expected early on. In such a case, gold is more likely to adhere to its more predominate negative correlation to the stock market.
Generally speaking, this discussion is related to one that we have mentioned several times (especially in the Securities Analysis and Trading Webinars) in that the most critical thing an analyst must be able to do is to understand when certain relationships and variables are relevant versus when they are less relevant. This is an extremely difficult task to achieve.
Oil & Gas
As expected, crude pricing has eased off highs made a few months ago. The most relevant variable responsible for oil price declines include recent statements made by the Federal Reserve that the economy is likely to experience some “pain” as it struggles to control inflation.
There is also speculation that Washington will reach an agreement with Iran with respect to its nuclear program, thereby leading to removal of sanctions which would permit the flow of Iranian oil exports into the global market.
Inflation & Interest Rates
The next Fed meeting is scheduled for September 20-21. As the Federal Reserve seeks to determine the next rate hike officials will be focused on various inflation data along with data from the labor market. Thus far we are leaning towards another 75bp rate hike during the September meeting, but additional data has not yet been reported which will factor into the Fed’s decision.
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