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April 13, 2022

Commodities, China lockdown and egg prices

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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Commodities continue to outperform

We start this week with a chart on commodity prices that we have posted previously as it is worth tracking throughout the year.

From the start of 2022, the S&P GSCI commodity price index has risen by the most since 1970 as the war in Ukraine continues to put upward pressure on prices. Commodity prices tend to display long, cyclical ups and downs because it takes a long time to ramp up investment and increase supply (e.g., construction time of oil platforms). The current price shock will not be as temporary as many economists believed last year, which is turning into a headache for central bankers wrestling with inflation far above target. Warnings about a new commodity super-cycle are not farfetched.  

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Price rises by commodity

The following bar chart displays year-to-date performance by commodity. Fossil fuels have seen the largest gains, with natural gas and oil in the lead, followed by agricultural products and industrial metals.

The broad price increase across all commodity classes, averaging 30.8%, will hurt both industry and consumers. Emerging markets stand to suffer most as food prices surge – a trend that can lead to political instability.

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US monetary policy and commodity markets

Supply and demand are not the only factors affecting commodity prices. Given the US dollar’s role as the international currency of choice, and the fact that commodities are typically priced in US dollars, the Federal Reserve’s monetary policy decisions also have an outsized impact.

The macroeconomist Jeffrey Frankel has demonstrated this relationship in various research papers. The following scatter chart shows a negative correlation between interest rates and commodity prices: when rates go up, commodities go down.

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US housing market

The Fed’s rate hiking is also pushing US mortgage rates to new highs – now reaching 5% compared to less than 3% just a few months ago. While the central bank has only raised rates once this year, the housing market has already anticipated a substantial part of the 2022 tightening cycle. This will eventually put downward pressure on house prices, which rose to a record in 2021.

As the following heat map shows, mortgage rates have not surged this quickly since the 1994 bond market massacre. Back then as now, bond investors were hurt as interest rates rose rapidly.

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Global monetary policy

We recently posted a global central bank decision index that shows the net balance of policy hikes against cuts from 115 central banks. This index, pushed forward by 11 months, displays a high correlation with the US ISM Purchasing Managers’ Index.

Global monetary policy is largely being set by the Fed as the US is a monetary superpower. The current tightening cycle is also driven by Fed policy, and this will most likely negatively affect US economic activity in the quarters ahead. As the chart shows, US economic activity looks set to fall on the back of tighter global credit conditions. Deutsche Bank is already forecasting a US recession in 2023.

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Shanghai in lockdown

The zero-Covid strategy pursued by China has led to a complete lockdown of the world’ third-largest city. Road traffic and subway usage in Shanghai have essentially dropped to zero. Residents have been confined to their homes for weeks and food supply is becoming problematic, sparking a massive backlash.

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China supply chain under pressure

The New York Fed now produces a supply chain pressure index for the largest economies, including China. The China index recently surged as authorities implemented harsh lockdown measures and shut down entire cities and regions. Export prices have started rising as a result.  

From a global macro view, the developments in China could cause even more economic damage than the war in Ukraine. Not only is it a global manufacturing centre, but the Chinese economy is substantially larger than all Eastern European economies combined, including Russia and Ukraine. A major slowdown or even a bursting real estate bubble would be a blow on global growth.

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Egg prices in France

Finally, here’s an Easter egg surprise.  

The price of eggs for consumers in France does not appear to be affected by the large swings in prices for farmers. As our last chart shows, the volatility of the agricultural egg price index has had little impact on actual shop prices over the last few decades – probably because retailers are reluctant to pass on the price swings to consumers.

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