Commodity Insight: A process, not an event

An important gauge of inflation was released this week, the Consumer Price Index. It showed August inflation above expectations at 3.7% and a new three-month high.

Food inflation was down to 4.3%, a 24-month low, but the Food Price Index was up 24%, a new record high.

A day later, the Producer Price Index, also a gauge of inflation, showed a rise of 0.7%, above expectation of 0.4% and the biggest monthly gain since June 2022.

The PPI report also showed, as did the CPI a day earlier, a big jump in energy prices. The PPI energy index jumped 10.5% on the month due to a 20% surge in gasoline prices.

Both the CPI and the PPI indexes show inflationary pressures remain stubborn, which means the Federal Reserve may hike rates higher yet.

And the very day the PPI report hit the wires, the European Central Bank hiked interest rates by a 25-basis-point increase to the highest level since 1999.

From CNBC: “The European Central Bank on Sept. 14 announced a 10th consecutive hike in its main interest rate, as the fight against inflation took precedence over a weakening economy.”

The highlights of the week were reports here and abroad showing inflationary pressure remaining high and the world’s central banks willing to hike rates in face of a weakening economy.

The bottom line appears to be two main forces at work. One, inflation is higher than expectations, and interest rates will be higher for longer, as well.

My bias remains the same as I have stated for some time. I believe the upside potential for the food and energy markets will be bullish, and the inflation reports this week are suggesting my lean is the right way.

From the article “Are we on the verge of a supply squeeze that could drive commodity prices up by triple-digits?” by FXStreet News, author Phil Carr states: “A long list of the world’s most powerful Wall Street banks have described the current economic climate as ‘The Golden Age of Trading.’”

He goes on to pen: “Traders are rushing back into commodities at one of the fastest paces seen in over a year to capitalize on the biggest macro themes driving the markets from reaccelerating inflation, ‘The Global Energy Shock 2.0′ to an escalating global food crisis, which is sending agriculture prices skyrocketing to all-time record highs.”

Are we truly in the Golden Age of Trading? Allow me to show a few of the volatile market scenarios that surfaced this week and the opportunities presented for traders.

Understand, a great deal of money can be made or lost when markets of any kind go higher or lower. Markets that go higher and lower are what traders live for.

This week, cattle and feeder cattle rose to new all-time-historic high prices. This week, corn fell to a new year-and-a-half low while wheat hit a three-year low. Sugar prices rose to levels not seen since 2011, 12 years ago.

Bond prices that move lower when interest rates move higher hit levels not seen since early 2011.

By the way, the last time bonds were down to such a level as early 2011, the Dow was around 12,300 versus this week of 35,300. And down through the years, history shows that bonds lead stocks.

After this week, are bonds a “buy” for a trader because they just hit a 12-year low? Or, are stocks a “sell” for a trader because bond prices are collapsing with rates on the rise due to inflation?

In March 2020, orange juice prices were around 100 USd/Lbs, but earlier this month prices rose to 389.

A year ago, cocoa prices were around 2,236 USD/MT, but a week ago hit 3,879, a level not seen since 1978, 45 years ago.

Four months ago, crude oil was around $64 a barrel, but this week rose a bit over $91 to an 11-month high.

Does a trader sell any of the markets above because they now seem pricey, or does a trader buy a break in hopes the up-trend continues? After all, traders know full well that “the trend is your friend.”

My old boss, Roy W. Longstreet, a legend in his own day, authored a book entitled, “Viewpoints of a Commodity Trader.”

From a chapter, “Trading is an Art,” he wrote: “The evidence is conclusive that commodity trading is an art. To be successful at it one must be an artist. Such a trader can scale the heights of accomplishment, realizing achievements comparable to those of a renowned concert pianist, or a painter whose works merit a place in the great galleries of the world.”

If Longstreet was still with us, no doubt he would be bullish on the food and energy markets based on fundamentals.

But he would be quick to say that a historic bull market evolves as a process, not an event.