As Federal Reserve Chair Janet Yellen takes the stage in Jackson Hole, Wyo., on Friday, financial markets are betting that weak inflation will persist and policymakers will hike just once in the next 12 months. Yet, surging industrial commodity prices — a leading indicator of inflation pressure — are starting to cast doubt on that consensus.
XIn recent days, aluminum has hit its highest level since 2013, copper futures touched $3.00 a pound for the first time since 2014, and zinc is near a decade high. The iron ore roller coaster is back on the ascent, with prices rallying nearly 50% after bottoming in June.
The commodity price upswing reflects the most broad-based global growth since the Great Recession. On Wednesday, eurozone manufacturing surveys showed that the growth-challenged region is expanding at its fasted clip in a half-dozen years. European Central Bank President Mario Draghi also will address the monetary policy gathering and may offer a signal as to when the bank will begin to taper its bond-buying program.
Advertisement
The Fed, by all indications, will announce a shift in its reinvestment policy on Sept. 20 to gradually begin scaling back its $4.5 trillion balance sheet. Yet as markets continue to discount a slower pace of tightening — current pricing doesn't point to another interest-rate hike until March 2018 — the rise in commodity prices suggest investors may be underestimating the power of a synchronized global upturn to push inflation higher.
The rise in commodity prices, which also is being helped by China's moves to curtail production amid environmental concerns, has sparked the mining sector, with Freeport-McMoRan (FCX) making a run at a 15.46 buy point this week and BHP Billiton (BHP) just below a 41.89 saucer-base buy point. Last week, Southern Copper (SCCO) hit a buy zone. Brazilian miner Vale (VALE) rose 3.3% on Wednesday and is just below a 10.50 buy point of a cup-with-handle base going back to late February.
IBD'S TAKE: On Tuesday, IBD shifted its market trend gauge to "confirmed uptrend" from "uptrend under pressure," the equivalent of a flashing yellow light turning green. Read IBD's The Big Picture column each day to stay on top of the market direction, a key indicator that lets you know when you can be aggressive and when you should move to the sidelines.
One reason inflation pressures eased after peaking in February was a pullback in commodity prices. The Fed's preferred personal consumption expenditures price index has shown the annual rate of inflation easing sliding from 2.2% in February to 1.4% in June, and core inflation easing to 1.4% from 1.9%.
The reversal to the upside for industrial commodities, which hasn't yet included a rise in oil prices, may take some months to feed through to end prices. While subdued inflation pressure also reflects competitive pressures in a wide of array of industries, the inflation outlook now looks a bit less tame.
These Mining Stocks Are Near Buy Zones As Metal Prices Rise
This Miner Hits Buy Point, 4 Peers Are Close As Metal Prices Soar