Markets are pricing in ‘unsustainable contradiction’ on low commodity price outlook, Goldman says

(Kitco News) Investors anticipating lower commodity prices due to slower economic growth may be surprised by the lack of supply and lingering commodity inflation, Goldman Sachs warned, adding that the market incorporates an “unsustainable contradiction”.

“Commodity markets today appear to have irrational expectations, as prices and inventories fall together, demand exceeds expectations and supply disappoints,” said Jeffrey Currie, head of commodities research. firsts at Goldman, and his team in a note last week.

The commodity market shifted from hoarding supplies to destocking, expecting slower global growth to reduce demand and add additional supply.

“Yet, if this turns out to be incorrect and excess supply does not materialize as expected, the rush for resupply would exacerbate scarcity, pushing prices higher this fall, potentially forcing central banks to generate a further contraction. extended to balance commodity markets,” Currie warned.

With signs of slowing inflation over the past week, markets have their eyes on an economic soft landing in the form of good enough growth as the Federal Reserve continues to tighten through 2023.

“In our view, macro markets are pricing an unsustainable contradiction – it is difficult to reconcile a loosening [financial conditions index]a more dovish Fed pivot, lower inflation expectations and lower commodity inventories,” Currie and his team noted.[There are] growing extreme risks on commodity prices inherent in the scenario of sustained growth, low unemployment and stabilized household purchasing power.”

Signs that commodity inflation is lingering longer include crude oil prices, which are still up about 30% from a year ago. According to the International Energy Agency, Europe’s summer heat wave, combined with limited supplies of natural gas, has boosted oil demand for power generation.

Another commodity inflation warning could be mixed signals from the markets themselves, Currie added.

“Today, equity and commodity markets signal investors of more persistent demand and higher commodity inflation, while inflation rates and charts signal an impending slowdown and easing in the economy. Until we see real commodity fundamentals soften, we remain convinced of the former, not the latter,” the team said.

Looking ahead, it also doesn’t look like a commodity-related recession is about to happen, with robust demand for oil, copper, aluminum and soybeans.

“In fact, among major commodities, only corn and iron ore demand are expected to contract in the near term, as the destruction of food demand and the weakness of China’s real estate sector lead to a micro-related slowdown,” said the Goldman team.

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