I am tempted to say financial markets have already done the Fed’s work. However, it is very likely that the minute the Federal Reserve even hints that rate cuts could be delayed until next year, the resulting tantrum in financial markets could be epic. The Fed is loathe to disappoint markets, and the message from the last meeting and subsequently from Jerome Powell has been to promise a rate cut sooner than later. Financial markets have persistently focused on any and all dovish twinges in Fed-related pronouncements. For example, from Powell’s testimony to Congress on March 6th (emphasis mine):

“We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured. Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 percent. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Powell can insert all the standard caveats he wants. Markets read this statement as saying rate cuts are on their way!

A Nervous Bond Market

Yet, bond markets have been a little “nervous” all year. For example, the iShares 20+ Year Treasury Bond ETF (TLT) has trended downward (meaning higher bond yields) so far this year with lower highs and lower lows. From TradingView:

TLT is just a fresh low of the year away from finally catching the stock market’s attention again.

Copper, Lumber, and Oil – oh my!

The bond market has good reason for some jitters. Several commodities have sprung back to life this year. Copper miner Freeport-McMoRan Inc (FCX) is welcoming the upcoming Fed meeting with a 7+ month high. FCX is up 19.8% in less than two weeks. (FCX has been stuck in a trading range since the beginning of 2021).

Lumber bottomed out in early 2023. This month, lumber broke out above last summer’s high and is back to levels last seen in August, 2022.

Oil, everyone’s favorite non-core component of inflation, has been in “stealth” rally mode all year. The United States Oil Fund, LP (USO) looks ready to launch parabolically on the wings of rate cuts.

Where will these prices go with rate cuts? I vote higher.

The Golden Touch

Speaking of getting ready for rate cuts, gold, my favorite hedge enjoyed a spectacular (and overdue) breakout this month. SPDR Gold Shares (GLD) traded at an all-time high at its peak this month.

I like buying the dips in GLD going forward. The odds seem sufficiently high for the Fed to feel “forced” into easing into a sea of market liquidity.

Straining to See the Weakness in Labor Markets

So maybe the Fed can strain its economic gaze and find an excuse to do a “proactive” rate cut. The graph below shows the unemployment rate has likely bottomed out (left axis and blue line) Yet, it remains near historic lows. Initial unemployment claims have been trendless with a recent peak set last summer (right axis and green line). Finally, real GDP quarter-over-quarter growth has levitated in positive territory and for the last two years has defied overly persistent expectations for a recession (right axis and red line). From my perch, I see no excuse for a rate cut here, but perhaps I am not creative enough with the data.

Sources: U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; U.S. Employment and Training Administration, Initial Claims [ICSA], retrieved from FRED, Federal Reserve Bank of St. Louis; U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis.

The Stock Market’s Giddy Anticipation

The stock market’s giddy anticipation of rate cuts is poetic. The stock market has soared on loosening financial conditions and has been able to ignore just about any bad news the macro environment tries to toss out there. Recent successive all-time highs speak volumes to the buffer the Fed can enjoy if it so chooses to wait out the Presidential election before making changes to monetary policy.

Conclusion

With market breadth increasingly lagging the stock market’s ascension, I have been a skeptic about the overall rally for several weeks. The Federal Reserve is probably the last catalyst between now and the Presidential election that has a chance of validating my skepticism. If the Fed complies with the market’s giddiness, there is no telling how high the market could soar in coming months. If the Fed decides to wait things out, the stock market will lose a major contributor to the upward and higher fund. Then again, maybe the Fed pulls off a magical “hawkish rate cut” (one and done rate cut with a warning about the potential for inflation to rise from the ashes). The Fed could figure out just the right balance between disappointing the stock market and fueling ever increasing levels of speculation and higher commodity prices…

Be careful out there!

Full disclosure: long GLD

The post Financial Conditions Make A Monetary Roundtrip and Undercut the Need for Rate Cuts appeared first on Inflation Watch.

“The price of gold has increased from about $1,200 per ounce a year ago, to over $1,700 today. This has eroded our gross margin by about 1.5% in that period. We are transitioning to copper, but this will take some time.”

MRVL also noted that foundry prices have fallen more slowly than expected, and the company is looking for new fabs with better pricing.

Author disclosure: long GLD and GG

The post Gold prices squeeze margins at Marvell Technology appeared first on Inflation Watch.

Disclosure: author owns FCX

The post Copper Prices Rebound Strongly appeared first on Inflation Watch.

“‘For a while, hedging had become unfashionable. This has changed,’ said François Combes, head of commodities trading at Société Générale. ‘You have to go back at least five years to find the last time there was genuine hedging of this scale.'”

Currently, this seems to equate to a hedge of about 25% of production. This reported bearishness has not yet shown up in lower copper prices. An analyst in the article claims that copper prices have so far remained firm because producers are buying options instead of selling futures.

The robust recovery in copper prices has been led by Chinese demand. With other major economies experiencing sluggish growth, there is no likely buyer to fill any gap in Chinese purchases anytime soon. These dynamics imply that the volatility in copper prices could significantly increase in the near future without clear signs that Chinese demand will remain firm.

The post Hedging activity by copper producers hits five-year highs appeared first on Inflation Watch.

“The WBMS said that for the first eight months of this year, their was a supply deficit in the copper market of 161,000 tonnes, compared with last year’s 16,000 tonne oversupply for the first eight months of 2009.

This growing oversupply is indicative of the major issue facing the copper market; ever growing demand for the metal as the global economy recovers, and increasing demand from China and India, is failing to be met as no new major copper production or mines are coming on line. This situation looks set to continue probably into the longer term, and suggests the very fundamental premise that copper prices will continue to climb while supply fails to meet demand.”

We will be watching copper prices even more closely as the U.S. Federal Reserve gets ready to flood the U.S. economy with more money. Assuming its impact is not already priced into the market, copper prices could really take off later this year and into 2011. Copper has already reached pre-recession levels.

(Click for larger view)

The post Copper still experiencing upward pricing pressures appeared first on Inflation Watch.

Copper has quickly recovered almost all its losses from the sell-off that began in May. Copper is potentially heading for fresh post-crash highs.

Of course, copper is now much more important to the emerging and developing markets than to developed economies like America’s, but I think this price recovery provides a remarkable contrast to current fears of double-dips and deflation.

One could also interpret this price action as anticipation of more money-printing and stimulus from the developed economies instead of a positive indicator of fundamental future economic health. An even more bearish interpretation of the chart might point to the potential head and shoulders formation and/or the marginal lower low in June. These technicals definitely work against copper’s case form this perspective. However, until copper fails at the April highs, I believe the 25% rally off the June lows should be taken seriously. Similarly, a break above those highs will be very bullish and suggest a continuation of the rally off the late 2008 lows.

As with any technical call like this one, confirmation of the signal must precede confidence. So, I am neither bullish nor bearish here on copper, just alert. For an example of how charts of copper’s price have been used to forecast potential economic danger, see “The Doctor is Calling” by Mike Shedlock at MISH’S Global Economic Trend Analysis (September 25, 2006). In this case, copper failed to confirm the bearish signals and instead proceeded to rise in price for almost another two years before finally peaking and then crashing.

The post Copper On the Move Again appeared first on Inflation Watch.

The post What is copper telling us? appeared first on Inflation Watch.

The dollar’s rise and monetary tightening in China have no doubt played a role in pressuring copper prices this year. This trend bears watching given inflation should remain tame if commodities like copper continue to fall.

The post Copper Prices Plunge in 2010 appeared first on Inflation Watch.

“Particularly in oil, sands, copper and iron ore as we’ve talked about in the past, the big five [mining companies] that do mind the preponderance of the copper, their yields are down significantly which means that they need more equipment to get the same amount of ore out of the ground, and quite frankly the lack of the exploration in the low yields has led to the type of copper price that we’re seeing right now, and until more production can hit the market and that’s not going to be immediate, we see that copper pricing will continue to stay where it’s at.”

There has been a lot of debate about how long China’s commodity stockpiling cycle will last and debate about whether “real” demand will pick up the slack once that cycle ends. According to BUCY, it seems that the lack of investment starting from the deflationary panic of 2008 has left copper producers flat-footed. Copper could lead the way in demonstrating how a destructive deflation, followed by historic easy monetary policy, introduce the global economy to its next inflationary cycle. Stay tuned…

The post Bucyrus Expects Copper Prices to Remain Elevated appeared first on Inflation Watch.

WIRE is a small producer of copper wiring ($486M market capitalization and net sales last quarter of $169M). The company described the squeeze it feels from higher copper prices during its conference call announcing third quarter earnings (click here for the complete transcript from Seeking Alpha):

“We’re tempted to lead the industry with several price increases during the quarter but met limited success…copper’s doubled since late last year and historically that’s been a fantastic situation for our industry. The change this time around on the copper climb has been there is a competitor that’s been very public with, they don’t agree with the passing on those cost, because they feel like the [market] won’t allow it.

Our approach to that is you pass it on and it is what it is regardless of the demand. It’s very transparent for contractors and distributors alike to see that copper is up $0.10 or down $0.05 or whatever the volatility would lead to and from my 20 years…copper is the deciding factor on a price increase or actually price decreases as well. You can have PVC, you can freight, you can nylon, you can have other cost influences but until copper trends one way or the other, the price increases typically fail.”

In other words, when construction activity picks up again and/or becomes relatively more robust, there is plenty of inflation waiting in the wings for commodity-based products like copper wiring. That inflation will likely translate quickly into higher costs for construction across the board.

The post Inflation Waiting in the Wings (Copper Wiring) appeared first on Inflation Watch.