Wednesday’s Consumer Price Index (CPI) for June rose 1.3% and landed above expectations at 9.1%, the highest since November 1981. Increasing inflation continues to impact money flow in the outside and agricultural commodity markets and might trigger the Fed’s next move on monetary policy.
In light of a 40-year high in inflation and growing fears of recession, the commodity sector has recently seen fund liquidation on fears of demand destruction.
So, why was the CPI so much higher than the 8.8% expected?
“I think the key there is energy prices,” Jared Bernstein, White House Council of Economic Advisors, told AgriTalk. “Energy prices by themselves made up half of the monthly increase and the report doesn’t factor in the decline in energy prices that has occurred in July.”
So is it possible the 9.1% is the highest inflation rate printed?
“I would say yes because I trade commodities all day and none of the commodities that generated that 9.1 are currently happening,” says Tommy Grisafi, Advance Trading.
This is prime evidence that demand is already slowing down.
Mike Zuzulo, Global Commodity Analytics, says, “It’s a demand destruction market, it really is, and these three things ... China, the Fed Reserve CPI and USDA to a lesser degree ... means demand is getting hit and the recession fears are simply bringing prices in right now.”
The bigger fear of the market is that the CPI number gives the Fed ammunition to raise rates in its July meeting. In fact, the markets are now indicating high odds of a 75-point to full point rate increase. Canada also raised their rate by more than the expected 1%.
“Yes, I think this helps the Fed solidify another three-quarters of a point to a percent increase in their monetary rate, in their interest rate, essentially into the U.S. long bond,” Zuzulo says. “I think this keeps fueling the U.S. dollar to new 20-year highs.”
However, Grisafi says what the Fed signals after the July meeting will be even more important for the markets.
“Stick around 45 minutes later for the meeting and then what Fed Chairman Powell says after that,” Grisafi says. “He could, you could see them raise rates a whole percent and the Dow could close up 1,200 that day. If they raise and say their job is done and they’re going to observe for a while that would add a spark to the market.”
Hopefully the shock would cool the recessionary fears that have melted down the commodity sector and other markets recently.
However, Both Grisafi and Zuzulo say until then, it’s hard to predict if the hedge funds are done liquidating in these markets. Plus speculators usually push the trend farther than the fundamentals dictate.
