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A new commodities boom is complicating central bankers’ anti-inflation efforts and may help derail prospects for significant interest-rate cuts any time soon.

Even before Iran’s attack on Israel over the weekend stoked fears of a wider regional war and disruption to oil supplies, crude had already risen significantly this year. That advance, together with a renewed exuberance in markets for precious metals and other raw materials, has pushed the Bloomberg Commodity Spot Index to an almost seven-month high.

The rally in oil makes gasoline costlier in the US, where pump prices are a political hot-button issue, especially in an election year. Copper, which is essential for wiring, plumbing and industrial machinery, is at highs last seen in mid-2022. Coffee prices have also leaped this year, while cocoa’s surge to an all-time high has thrown the chocolate industry into disarray.

“This latest rally makes it much tougher for central banks to ease interest rates,” said Trevor Woods, chief investment officer of Northern Trace Capital LLC, which is long across several commodities.

Investors are piling back into exchange-traded funds that track commodity indices, with the 20 largest, broad-based commodity ETFs pulling in roughly $1 billion since the beginning of March, according to data compiled by Bloomberg. At the same time, investors who fled commodities during the late-2023 selloff are now jostling to get back in.

“Stickier-than-expected inflation is a big part of commodity inflows, creating demand for portfolio hedges,” said Ryan Fitzmaurice, a senior commodities strategist at Marex. “A rotation back into commodities would not surprise me given the recent CPI misses.”

While the commodities sector comprises a diverse group of raw materials mined, extracted or harvested across practically every time zone, many of the most significant index components are rallying strongly at the same time. Higher raw-material prices are feeding into inflation and threatening to keep it elevated for longer.

Oil, the biggest and most consequential commodity market, has climbed this year amid escalating conflict in the Middle East coupled with higher-than-expected demand and flat supplies. Last week, Brent crude traded at more than $92 a barrel for the first time since October.

Industrial metals with a role to play in electric cars and data centers also are having a moment. But no commodity’s year-to-date gains even approach the more than doubling in cocoa that has candy makers shrinking packages and chocolate-lovers bracing for the worst.

Collectively, this all adds up to higher prices for consumers. Pacific Investment Management Co. recently warned that the Fed could resort to rate hikes if inflation keeps running hot. Markets currently see rates at about 4.9% when the Fed convenes in December — that compares with an expectation of 3.8% at the start of this year.

Conversely, gold has been hitting fresh highs on an almost-daily basis as increasing anxiety about inflationary pressures drives investors into safe-haven assets.

The renewed appetite for commodity investments partly shows up in the total value of derivatives contracts in the sector that traders are holding. That climbed to a seven-month high of $1.35 trillion at the end of March, according to JPMorgan Chase & Co.

“The Fed could take its time easing rates and if they stay higher for longer, we’ll probably see other central banks around the world ease before we do,” said J.D. Joyce, president of Joyce Wealth Management LLC in Houston.

To be sure, not all commodities are rallying. Natural gas prices in the US have been so low that some producers are shutting wells. Outside of cocoa, many agricultural markets have been softer on ample supply prospects, meaning less risk to food prices around the globe.

Nor is it certain that oil can rally much further from here even if tensions continue to mount in the Middle East. Despite Iran launching more than 300 missiles and drones at Israel, Brent crude prices were little changed when trading resumed in Asian hours Monday.

“Any rise in oil prices on higher geopolitical risks may be dampened by oil producers deciding to hedge their price risks and sell forward their production,” Goldman Sachs Group Inc. analysts said Sunday in a note.

How long will the current commodities rally last? Although analysts at Macquarie Group Ltd. said last month that energy and commodities are entering the “the first throes of a cyclical upswing,” most observers aren’t calling this the beginning of another supercycle.

If input prices get too high it can ultimately damp consumer demand for finished goods. And any kind of economic slowdown due to inflation could be bad news for President Joe Biden as he tries to convince voters he’s managed the economy well during his time in the White House.

“Commodities are the significant input for many industries and rising prices will start to hurt growth if higher prices are not able to be passed along to consumers,” said Rebecca Babin, senior energy trader at CIBC Private Wealth.

However, Rheinmetall AG advanced by 1.95% on rising geopolitical tensions.

Eurozone Industrial Production and the ECB

On Monday, industrial production numbers for the Eurozone will draw investor interest. Economists forecast industrial production to increase by 1.1% in February after sliding by 3.2% in January.Better-than-expected numbers could support expectations of an improving economic outlook. However, investors should monitor news from the Middle East. The threat of retaliation to the Saturday attack on Israel could impact buyer demand for riskier assets.Moreover, ECB commentary also needs consideration. ECB Chief Economist Philip Lane is on the calendar to speak.

US Economic Calendar: Retail Sales and the Fed

On Monday, US retail sales figures for March could further influence the Fed rate path. Hotter-than-expected numbers could end bets on a June Fed rate cut.Economists forecast retail sales to increase by 0.3% in March after rising by 0.6% in February.Other stats include the NAHB Housing Market Index and NY Empire State Manufacturing Index numbers. However, the stats will likely play second fiddle to the retail sales data.Beyond the numbers, earnings results also need consideration. Goldman Sachs (GS) is on the calendar to release earnings results.

Near-Term Outlook

Near-term trends for the DAX will likely hinge on updates from the Middle East, central bank chatter, and earnings results. However, rising geopolitical tensions would likely overshadow economic indicators and earnings results.In the futures, the DAX and the Nasdaq Mini were up 13 and 51 points, respectively.

DAX Technical Indicators

Daily ChartThe DAX hovered above the 50-day and 200-day EMAs, affirming the bullish price signals.A DAX return to the 18,000 handle could support a move to the 18,250 handle. A break above the 18,250 handle could give the bulls a run at the April 2 all-time high of 18,567.The Middle East, central bank commentary, corporate earnings, and the US economic calendar need consideration.However, a fall through the 17,850 handle would bring the 50-day EMA into play.The 14-day RSI at 46.57 indicates a DAX drop below the 17,615 support level before entering oversold territory.

4-Hourly ChartThe DAX remained below the 50-day EMA while holding above the 200-day EMA, affirming the bearish near-term but bullish longer-term price signals.A return to the 18,000 handle would support a move to the 50-day EMA. A break above the 50-day EMA could bring the 18,500 handle into play.Conversely, a fall through the 17,800 handle could give the bears a run at the 17,615 support level.The 14-period 4-hour RSI at 40.09 suggests a DAX fall through the 17,800 handle before entering oversold territory.

Source: FX Empire

U.S. economic growth that keeps motoring above its potential is emerging as a key prop for an ongoing global expansion, but spillovers from persistently high inflation and tight monetary policy in the world's largest economy could pose new risks to a hoped-for "soft landing" around the world.

As global financial leaders gather in Washington this week for the spring meetings of the International Monetary Fund and World Bank, the outlook for the world's short-term economic fortunes may center on whether the surprising U.S. success is being driven more by constructive forces like increased labor supply and productivity or by outsized fiscal deficits that continue stoking demand and, potentially, inflation.

One answer supports what Chicago Federal Reserve President Austan Goolsbee has labeled a "golden path" where strong growth and falling inflation coexist, not only in the U.S. but in other countries tied to it through exchange rates and trade channels that have kept imports near record highs. The other may point to a bumpy ride ahead if the Fed concludes that U.S. demand remains too strong for inflation to fall, and decides it has to postpone expected interest rate cuts or - in the extreme - resort to rate hikes it had all but taken off the table.

Recent data have not been helpful, with inflation stalled well above the U.S. central bank's 2% target for the first quarter of the year, gross domestic product still expanding above potential at 2.4% for the January-March period, according to an Atlanta Fed tracker, and Fed officials hedging their words about when the rate cuts might start.

"We're not yet where we want to be on inflation," Richmond Fed President Thomas Barkin said last week, capping a seven-day run over which U.S. jobs data showed firms hired an additional 303,000 workers in March, two to three times the estimated non-inflationary pace, and new inflation data further reversed the trends Fed policymakers relied on last year to pivot towards rate cuts in 2024. Data on inflation expectations, closely monitored by the Fed, also points to progress having stalled.

The data registered quickly in markets that lowered the outlook for a Fed monetary easing, something global officials no doubt have noticed ahead of discussions this week that may center on whether the world's post-pandemic bout of inflation and tight monetary policy is ending, or simply on hold until it is clear what happens in the U.S.

The IMF's latest World Economic Outlook summary of the global economy will be released on Tuesday.

But recent U.S. data already have had repercussions.

Though the European Central Bank has kept its rate-cut and inflation outlooks intact for now, ECB President Christine Lagarde's press conference on Thursday was dominated by questions of just how far the euro zone's monetary policy could diverge from that of the Fed if U.S. inflation persists. Other central bankers were more explicit that an extended inflation fight in the U.S. would constrain what they might be able to do.

"It's not just about whether the Fed can decide to act in June or a bit later, it's the entire monetary policy for maybe a year that is under question," Per Jansson, deputy governor of Sweden's Riksbank, told reporters, adding there was "not a zero chance" that the Fed might have to discuss whether further hikes in borrowing costs are needed.

That is not the baseline. The Fed's last round of economic projections, issued in March, showed none of its policymakers anticipated needing to move the U.S. central bank's benchmark overnight interest rate above the current 5.25%-5.50% range, where it has been since July.

But there was also a wedge creeping in, with minutes of the Fed's March 19-20 policy meeting showing that "some participants" said overall financial conditions may not be as tight as suspected, "which could add momentum to aggregate demand and put upward pressure on inflation," the sort of dynamic that, if sustained, could argue for higher rates.

Strong growth in the face of the highest policy rate in a quarter of a century has raised a series of questions for the Fed - and by extension for the global economy - about whether the impact of monetary policy is just slow to be felt, with a U.S. nosedive coming, or whether aspects of the economy like labor participation and productivity have changed for the better.

The U.S. Congressional Budget Office recently raised its outlook for potential U.S. economic growth on the basis of increased immigration and labor productivity, factors that would allow the economy to expand without generating inflation.

While Fed officials have acknowledged that both forces helped bring down the pace of price increases last year at a surprisingly fast rate - paving the way for what some have dubbed an "immaculate disinflation" - it's unclear how deep that well goes.

If it's determined the economy remains too strong or financial conditions too loose for a full return of inflation to the Fed's target, the U.S. divergence now helping pull the world upward may turn into a tight-money drag.

"I think the Fed's in watching-and-waiting mode," with perhaps only a single quarter-percentage-point rate cut this year, said Karen Dynan, a Harvard University professor and non-resident senior fellow at the Peterson Institute for International Economics.

While she does expect tighter policy to "take the edge off" demand and slow the U.S. economy, worse outcomes can't be ignored as long as the inflation problem persists.

"It's really a 'soft landing' forecast ... but I do think the risks of recession are somewhat elevated in the United States and other countries," she said.

Tomoki Yoshihara starts his shift at a meat-processing plant in rural Australia at 5am, and earns three times more butchering lamb for almost 50 hours a week than he did as a member of Japan’s military.

He’s among a record number of young Japanese granted working holiday visas in Australia last financial year, lured by higher wages that are made even more attractive by the weakening yen.

“From a salary perspective, it’s so much better here,” said the 25-year-old, who earns around A$5,000 ($3,300) a month after tax and lives in Goulburn, south of Sydney. “If you want to save money, Australia is the place to be.”

With similar visa programs in the UK, Canada and New Zealand recovering post pandemic, the outflow of talent risks exacerbating Japan’s acute labor shortage. It’s also a sign that many younger Japanese aren’t buying into the nation’s economic optimism as it exits from decades of deflation.

“Youth are questioning Japan’s economic outlook,” said Yuya Kikkawa,an economist at Meiji Yasuda Research Institute. “Living conditions are far tougher than the headline inflation figure suggests.”

The Bank of Japan finally scrapped the world’s last negative interest rate last month amid signs a virtuous cycle of wage gains is feeding demand-led inflation. But even after Japanese labor unions won their biggest wage hike in more than 30 years last month, there remains a notable gap in real wages with other advanced economies.

In 2022, average annual wages in Japan were $41,509, compared with Australia’s $59,408 and $77,463 in the US, according to the latest data from the Organisation for Economic Cooperation and Development.

A long-running trade off that put job security ahead of higher pay made more sense when prices were barely moving. Now with inflation at its strongest in decades, Japanese are starting to realize that years of static wages leave many of them budgeting each month before their next pay check.

“Japan’s wages hadn’t risen at all for 20 years while other countries were increasing theirs,” said Atsushi Takeda, chief economist at Itochu Research Institute. “With the yen getting weaker, the gap has become even bigger.”

Some 14,398 Japanese were granted working holiday visas in Australia in fiscal 2022-23, the highest number in Australian government data going back to 2001. It allows 18- to 30-year-olds (or 35 for some countries) to have a 12-month holiday and work in roles ranging from farming to hospitality, nursing, construction or office work to fund their trip. There’s also an option to extend as long as three years.

On top of the attractive wages, Australia has been a popular destination for Japanese due to its perceived safety, the similar time zone to Japan and recently relaxed rules that allow visa holders to work for more than six months for employers in certain industries.

Australia “always had a generous visa system but recent changes in lengthening the employment period made it even easier for Japanese to move there,” said Kotaro Sanada, a spokesman for the Japan Association for Working Holiday Makers.

Aside from Australia, Canada issued 7,996 such visas in 2023 until October, while the UK issued 898 last year, according to host-country data. New Zealand approved 2,404 in fiscal 2022-23. Sanada anticipates numbers will rise further as rules are relaxed. He expects the UK to become the next popular destination after the annual visa quota for Japanese was raised to 6,000 from 1,500.

“More people are flying abroad with hopes of getting jobs,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “If this trend continues, hiring younger workers in Japan could get even more difficult.”

Lili Takahashi, who flew to Australia this month shortly after graduating college, says she aims to spend two years on a working holiday and may apply for permanent residency and marry her girlfriend there. Australia, unlike Japan, allows same-sex marriages.

In the meantime, the higher wages in Australia — magnified by the yen at the weakest against the Australian dollar in almost a decade — will allow a better work-life balance.

“Japanese wages may be enough to survive,” said Takahashi, 22. “But it’s sad to think I wouldn’t have much money left for hobbies and hanging out with friends” if she stayed in Japan.

The rise in working holiday visas is part of a broader trend of Japanese choosing to live abroad. Last year, the number of Japanese who were permanent residents overseas was the most since the survey started in 1989, according to the Ministry of Foreign Affairs.

More than two-thirds of small- and medium-sized businesses say they face labor shortfalls, one survey found, and the number of bankruptcies attributed to manpower constraints reached a record high last year, according to a report by Teikoku Databank. Last year, the government allowed a record number of foreign workers into the country to alleviate the demographic struggles.

Itochu’s Takeda says the outflow of Japanese workers depends on the economic outlook.

“If the conditions for faster growth do take hold in Japan, maybe young people will see a reason to return,” he said.

After Israel and its allies shot down nearly all the missiles and drones Iran launched on Saturday, all eyes are on how Prime Minister Benjamin Netanyahu and his government will respond and whether it will lead to a cycle of more retaliatory attacks.