Four Commodities That Are Pointing To An Inflation Counter-Trend

Today just about everyone is convinced that Inflation is here to stay. Ask the average person in the street what the number one economic problem is? And the odds are 9 out of 10 they’ll answer Inflation.

In fact, in the latest Gallup Poll, more people view the economy as the nation’s number one issue. And the cost of living, or Inflation, is their number one concern.

But if there’s one thing we’ve learned in finance, it is that trends like Inflation are not static. They move up and down like the tide. It wasn’t that long ago that the economy and Inflation weren’t that much of a concern, as measured by Gallup’s poll.

People started seeing Inflation as a real problem once Joe Biden was inaugurated. Oh, but I’m sure that’s just a coincidence.

But my point is that we live in a very dynamic world where change is constant. So you can’t hold on to conventional thinking for too long, as it is quickly outdated.

Now commodity futures, as you know, are contracts based on the future price of various farm and agricultural, industrial and precious metals, and even financial instruments. For that reason, I’m on the lookout for any counter-trends to our inflation spiral. And I’ve turned up some over in the Commodities Pits.

On one side of these futures contracts is usually someone who wants to hedge against risk. Like a farmer who wants to take today’s price in his crop. Rather than risk a lower price later. And on the other side of the contract is often a speculator — a person who wants to take significant risk in the hope of reaping a great profit.

The Futures Market is an extraordinarily fast-moving, information-sensitive world. With a market that reacts to every little piece of news instantly and often explosively.

So with that in mind, I’d like to draw your attention to four markets, two industrial and two agricultural. And what’s interesting about all four commodities, they are all important markets, and they are all declining. Not something you would expect to see in an Inflation driven time like we’re in now.

First, we’ll look at two industrial commodities, lumber and copper. Lumber is always a vital indicator of the future trend in Real Estate. And as you know, I’ve been following the Real Estate market closely, as it appears to be slowing.

The price behavior of these lumber contracts seems to confirm the real estate slowdown. The lumber contract peaked in January, broke lower in February, and then hit its top in March. Lumber has trended lower since. The decline in lumber from March until today is well over 60%.

Known as King Copper because of its uncanny ability to foreshadow future moves in construction. Copper futures have only just this month begun to turn down. For over a year, copper has been trading sideways. Range bound without much momentum, either up or down.

But earlier this month, copper turned decisively negative. Copper is currently 18% below those highs of early June.

We see the same behavior in the two agricultural commodities, cattle, and Wheat. The cattle market hit its top in February and has been drifting lower.

Of all these commodities, the one making all the headlines has been the Wheat Market. Wheat has traded right along with the Ukraine conflict.

Ukraine, after all, is one of the world’s major Wheat exporting countries. So, when the war broke out, the Wheat Markets went vertical. In one of those incredibly explosive moves about which we just talked.

The Wheat market settled for nearly two months. Then, in May, wheat prices roared higher on rumors of wheat shortages. But since that May, top Wheat has trended lower, currently down more than 25% from its top.

As I say, what makes the wheat market so remarkable, is that it is trending just opposite from what we hear in some of the press. Wheat prices should not be declining if we expect a wheat shortage.

Yesterday’s report by the US Department of Agriculture that the winter wheat harvest is coming in better than expected helped cool off some of the speculations about wheat shortages.

So here are four critical commodities running counter to the overall inflation trend in the economy.

Does that mean that Inflation is almost over? Unfortunately, I don’t think so.

The number one contributor to Inflation by far is the rising energy cost. Remember the CPI data? Energy, mainly oil and gas, contribute three times as much Inflation into the system as number two: food.

So until we solve the problem of energy prices, Inflation will continue.

But what I am saying is: that the cards are in place. When energy becomes available at significantly lower prices, then the rest of the commodities complex will support lower Inflation.

Economic News

In just a few minutes the third and final estimate of the Nation’s Gross Domestic Product will be released by the Bureau of Economic Analysis. This is the final estimate for Q1. I’m amazed at how many people I talk to who do not realize that in the first quarter our economy declined by 1 1/2%. And today’s estimate is expected to confirm that. In other words, by the best estimate, this economy is already contracting.

Wall Street especially spends a lot of time debating whether or not we will fall into recession. My point is, that we’re likely already there. And once again this morning, that point will be demonstrated.

I expect to see, the negative 1 1/2% GDP number again flashed up on our screens, telling us all that for all practical purposes a recession is already here.

Tomorrow, incidentally the Atlanta Fed will provide their latest GDP Now estimate for the Second quarter, the quarter we’re in currently. At the last report Q2 GDP was expanding at a very tepid 3/10th%.

Also reporting this morning will be the GDP measure of inflation. This is one of several measures of the nation’s price levels that we go through each month. This one is considered perhaps more conservative than some of the others. But still Wall Street is looking for this measure to show inflation at 8% or better.

In earnings this morning, we’ve already had results from a couple of food companies, both trading lower at the moment. Cereal company General Mills and spice company McCormick’s are both, as I say, trading lower on their reports. Also trading lower this morning on their results is specialty retailer Bed Bath and Beyond.

In just a few minutes we should see results from Paychex Incorporated and MSC Industrial Direct.

Have a Great Day!

David

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