From oil to aluminum, the market for raw materials is running on all cylinders. The Bloomberg Commodity Index surged again to cap its biggest two-day gain since the start of September, gaining 2.14 percent in the period. Oil jumped above $65 a barrel. Aluminum rose to cap its biggest five-day gain since 2009. Cotton closed at its highest in almost a month.
Gains in commodities would normally be a good sign, reflecting a strengthening global economy. But that’s hardly the case now. Today’s higher prices are largely the result of concerns about the potential for a trade war between the U.S. and China, as well as sanctions against Russia. Plus, Saudi Arabia wants to push oil significantly higher, to $80 a barrel, to pay for the government’s crowded policy agenda and support the valuation of state energy giant Aramco before an initial public offering, according to Bloomberg News’ Javier Blas. All this wouldn’t be so disturbing if Citigroup’s economic surprise index for the global economy, which measures the data that exceed estimates against the data that fall below estimates, hadn’t dropped below zero on Friday for the first time since July.
The downside to higher commodities prices is that they tend to boost inflation expectations, which tend to damp demand for bonds and raise borrowing costs. Perhaps that’s why some economists and investors are beginning to warn that the potential for stagflation shouldn’t be ignored.
A LOAD OF DEBT
The world is awash in (more) debt. The Institute of International Finance in Washington said the global economy added about $21 trillion of debt in 2017, bringing the total to $237 trillion. That equates to 318 percent of global gross domestic product, which the IIF frames as good news because that number is down from about 324 percent in mid-2017 thanks to the strong global economy. Regardless, there are plenty of signs that investors have had their fill of bonds. At the U.S. Treasury’s auction of $30 billion in three-year notes on Tuesday, the largest for that maturity since 2014, dealers were stuck with 40.9 percent of the bonds, the most since September. Indirect bidders, which include foreign investors, pensions and mutual funds, purchased 47.6 percent, the least since September. Peter Boockvar, the chief investment officer at Bleakley Financial Group, noted in a research report that the results were concerning because not even the highest three-year yields in almost a decade were enough to spark strong demand. “It could certainly be because of rising supply,” Boockvar wrote in a research note. “Maybe it’s the rise in inflation expectations, where the (three-year) inflation breakeven is hovering around (five-year) highs,” he wrote. “Maybe foreigners continue to shy away from our debt. I don’t think though it’s because the market thinks the Fed is going to get more aggressive.”
STOCKS NAIL THE DO-OVER
The Standard & Poor’s 500 Index was headed to a big gain on Monday, rising as much as 1.88 percent, before an inexplicable late-day selloff erased most of those gains, leaving the benchmark up a meager 0.33 percent. It seems that traders weren’t about to let the same thing happen again on Tuesday. Aided by an afternoon tweet from President Donald Trump that was uncharacteristically conciliatory in tone toward China and trade, praising Chinese President Xi Jinping’s “kind words on tariffs and automobile barriers,” the S&P was able to close 1.67 percent higher, not far from its high of the day. Apart from trade, stock investors have a lot to be bullish about. Companies will soon begin reporting first-quarter results, starting with the big money-center banks later this week, and analysts expect earnings growth rates to be the highest since the second quarter of 2011. Energy, financials and materials should lead the bottom-up consensus forecast for 16.5 percent growth in earnings-per-share, with all 11 major sectors expected to report profit gains — a first since 2014, according to the strategist at Bloomberg Intelligence.
THE EURO GOES ON A RUN
Europe’s shared currency is beginning to put together an impressive rally. The Bloomberg Euro Index rose for the third straight day on Tuesday, the first time it has done so since the start of March. Tuesday’s increase was triggered by European Central Bank Governing Council member Ewald Nowotny, who told Reuters that the institution could lift its deposit rate alone when it starts raising borrowing costs. That fact that any ECB official is talking openly about raising interest rates is significant. But what was really impressive about the euro’s gain is that it stayed higher even though the ECB later disowned Nowotny’s comments, saying the views were his own and didn’t represent the official view of the Governing Council. To be sure, the currency has had trouble holding these levels. The Bloomberg Euro Index reached the levels it did on Tuesday four prior times since the start of February, only to fall back in the following days and weeks. ECB President Mario Draghi gives a speech in Frankfurt on Wednesday that could either help the euro break through this area of resistance or send it lower yet again. In the ECB’s annual report published Monday, Draghi wrote that “Looking ahead, we expect the pace of economic expansion to remain strong in 2018.”
RUSSIA IN TURMOIL
Emerging markets spent a second straight day focused on Russia, as the ruble again fell more than 4 percent and surging borrowing costs forced the government to cancel some bond offerings in the wake of fresh sanctions by the U.S. But to one influential observer, Russia may be close to becoming a “buy,” according to Bloomberg News’ Ksenia Galouchko. “If there’s no further comments from the U.S., it could be a matter of days before the Russian markets start rebounding — it could be the end of this week or the start of next week,” Sebastien Barbe, the Paris-based head of emerging-market research and strategy at Credit Agricole CIB, told Bloomberg News. He has been the most accurate ruble predictor since the second quarter of 2017. Some are comparing the latest turmoil in Russian markets to 2014, when the ruble fell to a record low at the height of the Ukraine conflict and there was an almost 50 percent drop in the price of oil. Now, the economic fundamentals and oil trading at around $70 a barrel play in Russia’s favor, according to Barbe. “Now that oil is calm, Russia is out of the recession, Putin was just re-elected, people will look at the asset prices, at the economic fundamentals and some will be tempted to buy amid expectations of stabilization,” he said.
Few data points are as closely followed as the monthly report on the U.S. consumer price index. For much of the past year, the report has been signaling that inflation is in check. That could all change Wednesday, when the government is forecast to say that core consumer prices, which exclude food and energy, surged 2.1 percent in March from a year earlier and up from a gain of 1.8 percent in February. That 0.3 percentage-point increase would be the biggest from the previous month since September 2004. Why such a big jump? An unusual plunge in costs for mobile-phone services in March 2017 that has weighed on the core consumer-price index is now set to fade, according to Bloomberg News’ Shobhana Chandra. Markets are on watch for signs of price pressures that could trigger a faster pace of interest-rate increases. On Monday, the National Federation of Independent Business said its monthly survey found that a greater share of small-business owners reported higher average selling prices.
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