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What the commodity rally means for inflation

The commodity sector has been rallying, reaching all-time highs, but what does this mean for the Federal Reserve's fight against inflation? HSBC Chief Multi-Asset Strategist Max Kettner joins Catalysts to discuss his outlook.

Kettner says the commodity rally has not "reignited a lot of those inflationary concerns." He notes that rallies such as the one occurring in Gold (GC=F) are coming from central bank buying. He also points out that commodities benefitted from less diversification happening in areas such as bonds coming off the Fed's rate hike cycle, pushing assets like Gold higher as well.

On the natural gas front, Kettner says he is not concerned, though he cautions if oil (CL=F, BZ=F) and natural gas (NG=F) prices were to rise simultaneously, it could pose a problem for markets. However, he says current energy prices in the US are still "relatively tame," adding that this indicates "we're nowhere near hitting that 2% inflation target anytime soon."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

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This post was written by Angel Smith

Video transcript

Commodities have been rallying.

Now for quite some time.

We've got copper, gold and silver all up between 15 and 30% this year.

And that's pushing the Goldman Sachs Commodity index up just about 8% year to date.

So what does all this mean in the feds fight to tame inflation?

And how is this rise in the commodities really threatening some improvement?

We want to bring in Max K. He is HS BC multi asset strategist here to talk about that and a lot more.

Max, talk to me.

Let's the the massive run up that we've seen in a number of precious metal specifically when you take a look at the run up in gold hitting multiple records when you take a look at the massive run up that we've seen in copper, how are you factoring that into whether or not this is really reigniting some of those inflationary concerns?

Yeah, I don't think it ring lights a lot of those inflation concerns, certainly not in gold.

When we look at gold.

I think a lot of that has been related to central bank buying.

A lot of that has been, uh, related to this diversifying of, uh uh, uh, central bank reserves, but it's also been really led by a little bit of a lack of diversification of bonds and a fixed income.

Let's remember, particularly in the last two years since the Fed has been embarking on this rate hiking cycle that actually, you know, most of the risk assets have been moving really with bonds.

So bonds overall, uh, rates really are no longer fulfilling that diversification property.

And a lot of that was pushing gold higher.

So I don't think that has an awful lot to do with inflation.

Copper, On the other hand, you could be arguing that maybe due to stronger demand, for example, But again, I think there are special factors in play here.

When we look at the Red Sea disruptions look at, for example, the throughput of copper through the Suez Canal.

That has really plummeted in recent months.

So it's really much more led by supply disruptions, which at the end of they should be proving more, you know, more temporary rather than a proper pickup and a proper cyclical pick up in demand.

Again, I wouldn't be too worried about it, particularly also when we look at copper.

A lot of that has been reportedly driven by CT. A lot of that has been driven by momentum players rather than really by an under sort of fundamental shift.

But Max, as you mentioned, it's kind of the breadth of these commodity price spikes that we're looking at the highest in two years.

I do want to specifically get your take on what we're seeing with natural gas specifically surging in the last month in terms of July contracts, having a 30% trough to peak rally before rolling over a little bit the past couple of days here, does that specific move that we're seeing in the gas space start to lead to some concern about the outlook moving forward for you?

I don't think quite yet because on the other hand, we've obviously seen oil prices down.

So when we look at natural gas prices, yes, they've sort of moved really in opposite direction of oil prices at the start of the year.

You know when when, uh, energy or oil prices specifically were going up, we've actually seen a bit of weakness in natural gas, and now it's the opposite.

I would be more concerned if both really rise in tandem.

If we get oil prices up, you know, 30 40% if it push us towards $100 and then on a year over year comparison, we compare sort of oil prices of 100 with 70 last year and then you know that brings natural gas prices up.

Uh, as well, then I think that would be more concerning.

But really, what we're seeing so far is that energy prices in the US are still relatively tame.

When we look at CP, I energy so the ener energy inflation basket.

And in fact, when we look in other categories, say, for example, CP i goods.

So goods inflation overall is still in disinflationary territory.

So overall, not really something that I'm overly worried about, but I think what it does show, and that is absolutely clear, is that we're nowhere near 2% inflation.

We're nowhere near hitting that 2% inflation target any time soon.

Not in the next three, certainly not in the next sort of 3 to 6 months