Back in the early 1980s the U.S. economy was experiencing lethargic growth but high inflation. The term “stagflation” was born. Just in the past couple weeks, that term has come to the front burner of the marketplace. The U.S. economy may now be slowing down, as seen by the recent downbeat gross domestic product report for the first quarter. Yet, recent data shows consumer and producer price inflation levels are remaining stubbornly high despite the tightening of U.S. monetary policy by the Federal Reserve over the past couple years.
The heightened stagflation worries in the marketplace at present are taking a toll on many raw commodity markets, including metals, crude oil, grains, international foods and livestock. Federal Reserve Chairman Jerome Powell on Wednesday afternoon reiterated the Fed’s resolve to bring inflation down farther before the central bank starts to lower interest rates. The thinking in the marketplace on future Fed policy moves has changed dramatically the past several months. It’s gone from as many as seven interest rate cuts in 2024, down to maybe one or two—and with some outliers saying the next Fed move may be to raise interest rates.
Stagflation is bearish for raw commodities because it suggests reduced demand from consumer and commercial buyers. The Fed is in a tight spot under such conditions because lowering interest rates to spur more demand may also prompt even higher inflation.
So how can you gauge the stagflation situation as it pertains to being bearish for raw commodities and when that will change? One way is to closely monitor the daily chart for the Goldman Sachs Commodity Index. The GSCI is a basket of major raw commodity futures prices rolled into one composite price index. See on the daily chart for the GSCI that the index is now trending down. As long as the GSCI is in a downtrend on the daily chart, serious stagflation concerns are likely to persist. When the price downtrend on the daily chart stalls out and ends, the present stagflation worries will likely have ebbed. And when the GSCI starts to trend higher on the daily chart, then risk appetite will likely have returned to the marketplace and raw commodity market bulls will again be energized.
Stay tuned!