Summary of Key Points
This year, the commodity markets experienced a collective slump in May and June, similar to the "double whammy" situation in 2022—when the U.S. raised interest rates and China imposed lockdowns. Currently, the situation is driven by the Fed's hawkish stance (rising interest rates) and weak demand prospects in China. For the commodity markets to turn around, two critical turning points are needed: a shift in U.S. monetary policy from hawkish to dovish (interest rate cuts) and the introduction of economic stimulus measures in China. The U.S. is not likely to cut interest rates for now, but there is a possibility of a change in the long term; as for Chinese demand, it will depend on policy signals, so it's advisable to wait for clear indications before taking action (i.e., adopting a "right-side trading" strategy).
Why Did Commodities Plunge in May and June? — The Combined Impact of Sentiment and Expectations
The sharp decline in commodity prices was not due to a lack of demand (many commodities actually have low inventories); rather, it was caused by a reversal in macroeconomic sentiment and expectations:
1. The "two-stage effect" of interest rates: Initially, rising interest rates were seen as a positive sign for the economy, leading to increased commodity demand. However, when interest rates reached a certain level, they began to suppress demand from both businesses and consumers (due to higher borrowing costs), causing prices to fall. In May and June, rising interest rates in both China and the U.S. directly hit commodity demand expectations.
2. The reversal of expectations regarding the Strait of Hormuz: There were hopes that the opening of the Strait of Hormuz would lead to increased inventory replenishment and improved market sentiment, but the Fed's hawkish stance (no interest rate cuts) completely reversed these expectations, leading to a sudden drop in demand.
3. A sense of déjà vu from 2022: Similar to the summer of 2022, when China's macroeconomic performance was weak and there were expectations of U.S. interest rate hikes, both fundamentals and the overall economy declined, prompting investors to sell aggressively.
Where Does the Hawkish Stance of the Fed Lie Now? Will It Shift to Dovish in the Future?
The Fed is not cutting interest rates for now, but there is a possibility of a shift in the long term. The reasons are simple:
- Reasons for not cutting rates now: Employment data has improved (significantly since March), and inflation has not reached the Fed's targets (for example, Trimmed Mean PCE inflation is still below 2%). These factors do not support an immediate rate cut.
- The logic behind a potential future shift to dovish policies: The Fed's current focus is on increasing supply (such as the newly passed housing legislation, which aims to curb speculation and increase housing supply). Lower interest rates are needed to make it more affordable for businesses to borrow and expand capacity or build new homes. Although Chairman Powell is currently hawkish, he may eventually shift to a dovish stance to support these supply-side reforms, though the timing is uncertain (it could depend on inflation levels or economic pressures).
What About Chinese Demand? When Will Policy Measures Be Introduced, and How Should We Interpret Them?
Regarding Chinese demand, the article suggests using a simple rule: when there are no policy announcements, focus on economic data; when policies are announced, pay attention to the specific measures.
- Current situation: Interest rates in China have risen rather than fallen in May, possibly indicating that China is following its own pace. Traditional industries need credit support, but current interest rates are not sufficient to boost the economy. Therefore, it is likely that policy actions will be taken in the future (such as reserve requirement ratio cuts, interest rate cuts, or consumer stimulus measures).
- Why wait for a "right-side" approach?: Decisions are made more carefully, and buying at low points too early can lead to missed opportunities. It's safer to wait for clear policy signals before entering the market.
What Should We Do with the Commodity Markets Next? What Signals Should We Watch For?
If you want to buy commodities on a dip, don't rush. Wait for two clear signals:
1. A shift in the Fed's stance: This could be indicated by a FOMC meeting announcing an interest rate cut or explicit dovish signals (e.g., statements suggesting that interest rate cuts may be considered in the future).
2. The introduction of Chinese stimulus policies: These could include policy decisions to boost the economy or specific measures such as infrastructure projects or consumer subsidies.
- Key events: The July FOMC meeting and China's central government meetings could provide potential signals, but they may not happen immediately. It's best to adopt a "right-side trading" strategy—wait for clear signals before making purchases to avoid unnecessary risks.
Could There Be Synchronization of Policies Between China and the U.S.? And What Would the Effect Be?
The article suggests that it is unlikely for China and the U.S. to coordinate their policies actively. However, if both countries take action simultaneously (e.g., the U.S. cuts interest rates and China introduces stimulus measures in September 2024), the effect could be more significant, as the two largest economies would jointly support demand.
In summary, commodity prices are currently at a "sentimental bottom," but a reversal will require concrete policy actions to confirm the recovery. Patience is key; waiting for clear signals before entering the market is a safer approach.