Apr 29 / Victor Arduin

Macroeconomics Weekly Report - 2024 04 29

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Global manufacturing a bullish signal for commodities

  • In the first half of 2024, commodities' prices are improving, some reflect the fundamentals of their markets, while others benefit from the improved economic environment.
  • The industrial sector, heavily impacted by rising interest rates, is now showing signs of recovery as the market anticipates an improved economic environment despite uncertainty over the timing of monetary policy reversal in the US.
  • Geopolitical risks are also prevalent in the market. While an escalation of the conflict in the Middle East is unlikely, the resulting uncertainty is driving up premiums in commodity prices.
  • With a higher commodities backdrop, central banks face an additional challenge in combating inflation, market's primary focus at the moment.


Despite the restrictive monetary policy, world growth has shown resilience in recent months. The IMF projects a 3.2% GDP expansion for 2024, highlighting that risks are now more balanced compared to last year. While interest rate hikes have significantly curbed inflation, market focuses on monetary policy reversal timing.

The Fed is likely to remain cautious, opting to keep borrowing costs elevated for an extended period compared to the ECB to prevent inflation resurgence. This may cause some constraint on commodities prices, but signs of an upward trend in the manufacturing sector offer some counterbalance. The BBG Industrial Metals Index, which fell during 2022 interest rate hikes, has recently reached its highest level since April 2023.

Given the latest recovery in industrial production, let's delve deeper into the current state of global industrial activity and how it relates to commodity prices.

Image 1: BBG Industrial Metals Index vs Fed Funds (%)

Source: Refinitiv

Image 2:  Year-to-Date Performance of BBG Subindexes and DXY

Source: Refinitiv

Commodity markets mirroring an improved economic scenario

The first quarter of 2024 was marked by the appreciation of several commodities, with one of the main ones being gold, which saw a growth of over 13% year-to-date. Other commodities also experienced significant gains, driven by supply factors; for instance, oil was influenced by OPEC+ measures, while cocoa saw a significant drop Africa’s production. In April, the highlight of the second quarter so far is industrial metals, which have already accumulated a 12% increase during the fortnight, as indicated by the BBG sub-index.

The industry was one of the sectors most affected by the rise in interest rates. Although there is still some uncertainty about when the reversal of restrictive monetary policy will occur in the US, the market is already pricing in an improvement in the economic environment, which has already impacted the industrial sector's recovery. One way to observe this is through PMIs, an index that indicates the pace of expansion or contraction of the sector. In March, both the US and China surpassed the 50 mark on the PMI index, indicating expansion, and it is expected that this pace of recovery will continue in April. This largely accounts for the surge in industrial metals consumption.

Image 3: JPMorgan Global Manufacturing PMI

Source: Bloomberg

Recovery underway, yet inflation risks persist

An uptick in manufacturing activity typically bodes well for commodities, particularly metals, minerals, and energy, given their integral role in factory production, alongside the reliance of logistics chains on fuels. Higher GDP revisions by organizations such as OPEC and the IMF further bolster the anticipation of a global economic rebound, fueling expectations of heightened demand. Additionally, some level of geopolitical uncertainty has manifested in the prices of various commodities, contributing to a bullish outlook for commodity prices.

Nevertheless, higher interest rates and a strong dollar remains a key topic for the market. Despite the US GDP growth in the last quarter recording 1.6%, which is below the expectations of 2.5%, inflation indicators still show risks. The PCE and Core PCE rose by 0.3%, in line with expectations, but the supercore of services, excluding housing, climbed to 0.39%. This remains elevated compared to the Fed's target interest rate of 2% annually, suggesting inflation might be more entrenched than anticipated.

Image 4: Commodity Prices Index

Source: Bloomberg

In Summary

Some commodity prices are responding positively to their market fundamentals. Among them, the energy complex, cocoa, coffee, and industrial metals stand out. The latter is responding directly to the ongoing recovery in the manufacturing sector.

Another factor influencing the market is sanctions. In recent weeks, the US and UK have enforced new restrictions on Russian metals, covering copper, aluminum, and nickel. This imposition has additionally bolstered metal prices in the last few days.

Inflation remains the market's primary focus. With worsening risk aversion in recent weeks and higher interest rates expected to persist, we've seen a rise in US Treasury yields and support for the dollar, theoretically impacting commodity performance.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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