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[hot discussion] Commodity strength evidence of Economic recovery also implies inflation risk, Future Price divergence
Jan 5,2018 16:34CST
The content below was translated by Tencent automatically for reference.

SMM: manufacturing is picking up and oil prices are rising to a three-year high as investors invest in commodities from oil to copper. Holger Schmieding, chief economist at Berenberg Bank in London, said it was gratifying.

For the global economy, the rebound in commodity prices suggests that years of loose monetary policy have finally boosted global economic activity, but have also increased dormant inflationary pressures, which also pose risks to markets. The resurgence of inflation has forced the central bank to raise interest rates more aggressively than expected.

In October, a study released by the central bank found that the last collapse in crude oil prices had reduced core inflation, excluding food and energy prices, by 0.2 percentage points. A study by the International Monetary Fund's (LMF) in September showed that oil prices rose by an average of 10 per cent and domestic inflation rose by 0.4 percentage points. In addition, Brent, the global benchmark, has jumped to nearly $70 a barrel this year, while palladium, a metal used to reduce car emissions, has hit an all-time high.

Amrita Sen, chief oil analyst at the consultancy, said the oil market was tightening rapidly, but there was strong demand for energy. This suggests that after years of worrying about deflation, the market is beginning to turn.

Byron r., an executive at Blackstone Group (Blackstone Group LP) Wien said oil prices were rising as the global economy continued to grow, particularly as demand soared in developing countries. Us oil prices are likely to rise to $80 a barrel in 2018.

Neil Dutta, head of US economics at Renaissance Macro Research, said on January 4th that while oil prices had been rising, retail stocks had been rising. This phenomenon suggests that the rise in oil prices is due to strong demand, not a decline on the supply side.

It is well known that the German economy is supported by manufacturing giants such as Volkswagen and Siemens. Germany's unemployment rate fell to an all-time low in December, according to this week's report, meaning manufacturing activity has rebounded strongly after weakness and has flourished.

As a result, many Wall Street financial institutions, including Goldman Sachs, predict that the global economy will grow by about 4% in 2018, the fastest pace since the recovery in 2011.

If the global economy does grow by 4% in 2018, it will mean an increase in demand for millions of barrels of crude oil, an increase in demand for copper, and an increase in consumption of corn, meat and other foods. So far, investors have been betting heavily that the commodities rally will continue, with net long positions in West Texas Intermediate and Brent at record highs.

Of course, there are also some who object to this. They believe that as the economy develops, economic growth is likely to slow and will be detrimental to the commodity industry. London consultancy Capital Economics Ltd. (Capital Economics Ltd.) Caroline Bain, chief commodities economist, said the current price reflected excessive optimism about demand, which could in fact trigger lower prices this year as the Chinese economy slows.

In addition, the rise in commodity prices has been linked, in addition to stronger demand, to supply constraints, particularly well-orchestrated reductions in oil supplies in Saudi Arabia and Russia.

Michael McDonough, Bloomberg's chief economist, said that while demand for oil was rising, higher US oil production was likely to keep prices within a stable range against the backdrop of higher oil prices.

On copper prices, investors worry that strikes (wage negotiations) in Chile, the world's largest copper producer, and cold weather in the US will disrupt mining activity.

(SMM) Yan Cedar Translation of Shanghai Nonferrous Metals Network

The text reads as follows:

Global Factory Boom Spurs Commodities Prices From Oil to Copper

The strongest manufacturing activity since the aftermath of the global financial crisis is slowly draining commodities surpluses, sending prices to a 3-year high as investors pour money into everything from oil to copper.

"Rarely has the outlook for a New Year been as encouraging as it is today," said Holger Schmieding, chief economist at Berenberg Bank in London.

With factories around the world humming, demand for raw materials is fast increasing. The Bloomberg Commodities Spot Index, tracking the price of 22 raw materials, jumped to its highest since December 2014 on Thursday. The gauge has risen for a record 14 days in a row.

For the global economy, the pickup in commodities poses a conundrum. It could show how years of ultra-lax monetary policies have finally boosted activity and may even be enough to revive long-dormant inflationary pressures. The risk is inflation reemerges faster than central banks expect, forcing them to raise interest rates more aggressively than they now plan or investors anticipate.

According to a September study by the International Monetary Fund, a 10 percent gain in the price of oil increases, on average, domestic inflation by about 0.4 percentage points.

Such an effect might help push U.S. inflation back towards the Federal Reserve's 2 percent target. Research from the central bank published in October found the last plunge in crude had shaved 0.2 percentage point from core inflation, which excludes food and energy prices.

Already this year, Brent crude, the global benchmark, has jumped to nearly $70 a barrel, and palladium, a metal used to reduce cars tailpipe emissions, hit an all-time high.

Energy Aspects Ltd. In London "We see very strong demand, and it's really broad based."

After years of worrying about deflationary risks, investors are starting to think in the other direction. Byron R. Wien, an executive at Blackstone Group LP, included a rise in U.S. Oil prices to $80 a barrel among its top 10 potential surprises for 2018 in global markets.

"The price rises because of continued world growth and unexpected demand from developing markets," he wrote in a note to investors.

How much fallout there is on the economy ultimately depends on whether the rise in commodity prices is driven by increased demand or a decline in supply.

Neil Dutta, head of U.S. economics at Renaissance Macro Research, told clients on Thursday that while oil has been climbing, retail stocks have been doing so too. "The market is basically telling you that the rise in oil prices is probably more about strong demand than a negative supply shock and is not enough to derail the consumer," he said.

Beyond stronger demand, commodities prices are though also benefiting from less-friendly supply constraints, notably the reduction in oil supply orchestrated by Saudi Arabia and Russia.

In copper, investors worry that wage negotiations in Chile, the world's largest producer of the red metal, could disrupt mining activity. And freezing weather in the U.S., the world's top producer of agricultural commodities, is helping to increase the price of wheat and other grains.

On the flip side, the rally could sow the seeds of its own destruction as producers such as shale oil companies bringing extra supplies to cash-in higher prices. "Rising U.S. Production on the back of higher prices could keep prices range-bound even though demand for oil is rising," said Michael McDonough, chief economist at Bloomberg Economics.


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