The CPI figure of 0.3% was lower than the estimate of 0.4% and significantly less than the 0.5% reading posted in July. The lower-than-expected figure offers some support to the Fed’s and Biden administration’s view that current high inflation levels will be temporary, as it shows prices surged less than expected in August. U.S. Stocks are beginning to show some weakness as investors fear a slowing economic recovery amid Covid-19 disruptions and increased inflation. With August’s CPI level lower than expected, a taper announcement next week at the FOMC meeting is highly unlikely. Treasuries advanced.
Stocks have been weak recently with the S&P 500 has retreated to its’ 50-day moving average. As we approach option expiration in September, it will be interesting to see if stocks can bounce back once again this month.
Commodities globally reached a 10-year high, mainly due to increasing costs for goods related to the reactivation of economies. From construction, to manufacturing, to energy, prices are surging and threatening faster inflation levels. The high demand from economic recovery and supply disruptions are boosting commodity prices globally. Aluminum reached $3,000 a ton for the first time in over 10 years on the London Metals Exchange. Aluminum producers in China face the challenge to comply with the government’s energy intensity reduction goal, consequently, aluminum producers have reported cuts in production. Supply disruptions in Aluminum could last for years according to the Harbor Aluminum Summit in Chicago. In addition, China’s steel restrictions have shocked demand expectations for Singapore Iron Ore, which has fallen over 40% since its last peak in May.
Aluminum Futures active contract (LA1 Comdty) 10-year weekly chart
Demand for physical commodities is now at pre-pandemic levels, except for oil, causing incremental scarcity across markets. Agricultural commodities, on the other hand, have eased as a result of the U.S. government’s crop forecasts showing larger than expected reserves.
Bloomberg Commodity Index (BCOM Index) 5-year Chart
Europe is showing a dramatic spike in energy prices, signaling what could happen to other materials. Rising energy costs, as winter approaches, will threaten economic growth in the Northern Hemisphere. Oil is above $70 a barrel once again, as almost half of crude output in the Gulf of Mexico remains on hold after Hurricane Ida, according to the Vitol Group.
Crude Oil Futures active contract (CL1 Cmdty) 1-year chart
Volatility levels are suppressed as we march into the last quarter of the year. Investor sentiment is growing that stocks are overvalued, and inflation is accelerating, many think a correction is yet to come. In the next couple of weeks, it will be interesting to see if stocks can rebound, maintain above the 50-day moving average, and reach record levels like they have done in past months.