Commodities Rally Reflects A Better Economy, But Also Poses Inflation Risks

Rising costs for manufacturing and transportation basic materials indicate investors' optimism for a protracted expansion and inflation.

Global commodities index S&P GSCI has risen 12% this year, beating S&P 500's 9.1% rise. Copper and oil are up above 10% and 17%. Even gold is setting records, climbing 13% to $2,332 a troy ounce.

Analysts say economic growth will boost U.S. and Chinese demand, driving the rise. A couple of surveys last week showing manufacturing recovery in both countries sparked new purchasing.

That prolonged an upsurge that has bolstered energy and materials company shares and threatened to raise fuel prices before summer driving season.

Many expect the upswing to continue. The Macquarie Group Commodities Strategy team reported that real income growth has reaccelerated global goods demand, which might boost commodities prices.

Investors are already doubting the Federal Reserve can cut interest rates later this year, which might hinder its inflation fight. A stock-market boom that reached record highs was fueled by the possibility of lower borrowing costs.

“Commodities are going to be potentially one factor that can interfere with Fed cuts,” said Francisco Blanch, Bank of America global commodities and derivatives research head.

The rebound reverses an 18-month drop from oil, natural gas, grains, and industrial metals' highs after Russia invaded Ukraine. Prospects of a U.S. recession, increased interest rates, and a Chinese economy still recovering from Covid-era lockdowns weighed on futures in subsequent months.

The recession never occurred. The U.S. economy has remained strong despite falling inflation. The labor market consistently outperforms. Last Monday, the Federal Reserve Bank of Atlanta model boosted its inflation-adjusted first-quarter GDP projection to 2.8%.

Drone attacks in Russia and Middle East turmoil have raised oil prices. Brent crude futures, the global oil benchmark, reached $90 a barrel, their highest level since Hamas's October attack on Israel.

Last week, SEB chief commodities analyst Bjarne Schieldrop said slower U.S. production growth and output cutbacks by the Organization of the Petroleum Exporting Countries and its partners have compressed supplies.

Oil producer shares are rising with prices. Energy is the second-best S&P 500 sector this year, up 16%. Friday found Exxon Mobil stock at a record. Strong demand for gasoline, diesel, and jet fuel has also driven refiner shares like Valero Energy, Marathon Petroleum, and Phillips 66 to record highs.

Some economists believe speculators have fueled the commodities surge. Bullish copper bets on the London Metal Exchange reached their highest level since 2021, according to TD Securities.

Bob Elliott, CEO of Unlimited, which employs AI to watch trade activities in real time, said macro hedge firms scrambling to unwind bets that prices would fall, boosting oil's current gain.