‘Irrational expectations’ keeping commodity prices low -GS "Investors counting on a softer global economy to pull commodity prices lower may instead be faced with scare supplies and inflation, as the market is awash in contradictions, Goldman Sachs has warned clients.
“Today, commodity markets appear to hold irrational expectations, as prices and inventories fall together, demand beats expectations and supply disappoints,” wrote Goldman’s head of commodities research Jefferie Currie and his team, in a note that published late Thursday.
They note the commodity space has moved from hoarding to destocking, with consumers using up inventory at higher prices on the hopes that a broad softening of the economy will create extra supply.
“Yet should this prove incorrect and excess supply does not materialize as we expect, the restocking scramble would exacerbate scarcity, pushing prices substantially higher this autumn, potentially forcing central banks to generate a more protracted contraction to balance commodity markets,” said Currie.
Financial markets are now pricing in a soft economic landing outcome, minimal further interest rate hikes, sufficient growth to keep earnings supported into 2023 and dissipating inflation. Evidence of the latter emerged this week as both U.S. consumer and producer price inflation missed expectations, driving hopes that the Federal Reserve may be able to ease up on policy tightening sooner than later.
BLOOMBERG, GOLDMAN SACHS INVESTMENT RESEARCH “In our view, macro markets are pricing an unsustainable contradiction — it is difficult to square a softening [financial conditions index], a more accommodative Fed pivot, falling inflation expectations and drawing commodity inventories,” said the Goldman team.
“Today, equity and commodity markets are signaling to investors more persistent demand and higher commodity inflation, while rates and inflation curves are signaling an impending slowdown and softening of the economy. Until we see real commodity fundamentals soften, we remain convicted of the former, not the latter,” they said. BLOOMBERG, GOLDMAN SACHS INVESTMENT RESEARCH The Goldman analysts said investors should also take a look at history, noting that outside of pandemic lockdowns that rapidly hit demand in March 2020, every prior recession has seen commodity prices rally in the initial months owing to demand remaining above supply. Exogenous shocks such as the 2001 terrorist attacks and the credit crisis of 2008 are exceptions as demand sharply decelerated following those events.
And while high prices are keeping overall activity constrained, notably in Europe and among emerging markets, what’s occurring is hardly looking like a commodity-based recession as oil demand remains healthy, alongside copper, alumunium and soybeans.
“In fact, of the major commodities, only corn and iron ore demand are
expected to contract in the near term, as feed demand destruction and a weak Chinese property sector drive micro-related softening,” they said."
'Irrational expectations' are keeping commodity prices unsustainably low, warns Goldman - MarketWatch
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