Inflation Surprises as Commodities Rip Higher
Last week’s inflation data surprised market participants on the upside.
CPI YoY: 3,2% vs. 3,1% estimated
Core CPI m/m: 0,4% vs 0,3% estimated
Even larger was the upside surprise in the PPI data.
Friends of the 70s double-dip inflation scenario will probably love this chart. Take a closer look at the 70s and how inflation recovered before it take of in the late 70s for another rip higher.
Gold declined after a key inflation report topped forecasts for a third straight month, signaling persistent price pressures that will likely delay any Federal Reserve interest-rate cuts until later in the year.
Cocoa & Coffee
Cocoa continued its rise in the past week and with coffee another soft commodity joined the bull race. Both markets are at this point purely driven by speculation and have greatly diverged with fundamentals.
This of course doesn’t mean at all that the price surge has topped out - quite the opposite is likely as short covering gets imminent and market participants have to buy back their short positions.
The main fundamental reason that Bloomberg for coffee price found was driven “by low inventories at top robusta grower Vietnam, and concerns over dry weather harming next season’s output.“ But here is the more important argument in our opinion:
The coffee market has been supported as hedge funds exit the cocoa market — where big shortfalls have sent prices soaring — and pile into coffee. “Speculators added a handful of gigantic buying,” broker Thiago Cazarini said in a report that Bloombegr cited. “Producers remained sidelined and the buying surpassed the selling.”
“We are currently looking at possibly the largest net speculative position in coffee futures in history without a significant story to merit its existence, outside of cocoa market is crazy,” said Ilya Byzov, a coffee trader at Sucafina.
Looking at cocoa - there is evidence that the supply will come back online eventually. The problem is that many cocoa trees were destroyed by strong winds or harmed by extreme drought. The time from planting cocoa seeds to harvest the first cocoa tree is roughly three years. So once again the cure for high prices will eventually be high prices. It’s also likely that we will see quite some demand destruction due to high prices on the consumer side in the coming months.
In Other News…
This week look out for the following:
Retail Sales and Empire State Manufacturing Index on Monday
Philly Fed Manufacturing Index on Thursday
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Till next Monday, Lukas
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