Commodities React to Interest Rate News
September 15, 2022
Read Time 2 MIN
Macro Outlook: Inflation Drags on Commodities Recovery
Commodities continued to recover from the July lows for most of August, but finished the month on a weak note. The UBS Constant Maturity Commodity Index (CMCI) finished the month down about 1%, but continues to hold strong year to date, at about 15%. The late month pullback was caused by Jay Powell’s hawkish Jackson Hole speech. The market was expecting a hawkish tone from the speech, but was surprised by the “higher for longer” interest rate comments. Most investors had been expecting a quick pivot by the U.S. Federal Reserve (Fed) next year and a return to rate cuts. Jay Powell made it very clear that the Fed will continue to raise rates aggressively this year and keep them higher for an extended period of time. This change in the interest rate outlook triggered more gains in the U.S. dollar and a pullback in commodity prices at month end.
Index & Sector Review: Energy Demands Hold Steady Due to Natural Gas Price Woes
The Russia–Ukraine war continues to keep European natural gas prices elevated, which in turn drove U.S. natural gas prices higher in the month of August. Putin has now shut down the gas flowing to Germany through the Nord Stream pipeline indefinitely.
CMCI again lagged the Bloomberg Commodity Index (BCOM) during the month because of BCOM’s large and overweight position in U.S. natural gas. BCOM exposures are not re–weighted during the year, effectively letting their winners run. BCOM now has over 10% of its exposure in U.S. natural gas compared to CMCI’s re–weighted 3% exposure. Over the long term, we believe that CMCI’s monthly re–weighting may produce relative outperformance, but this year it is definitely causing the underperformance relative to BCOM.
From a sector perspective, only agriculture and livestock finished the month positively. Agriculture was up 1% while livestock was up 3.5%. The agriculture sector was led by strong gains in cotton over concerns around this year’s U.S. crop due to weather. Both cattle and hogs were higher in August.
For the month and year to date, the precious and industrial metals sectors were the weakest.
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