Agricultural commodities continue to soar

Another reason to expect inflation to rise this year

Chart of the Day

It was another strong day for agricultural commodities yesterday, with corn and wheat up by near 5% and soybeans by 3.5%. All three have been on a very strong run since the middle of last year, which reportedly reflects a variety of factors including adverse weather and disruption from the coroanvirus in key growing countries. Those rises will put upward pressure on inflation across the world this year, especially in emerging markets where food prices make up a larger share of consumers’ expenditure. The UN has already warned about the potential for higher food prices to cause social unrest, given people in many countries have already suffered greatly from the pandemic.

Macro

Food inflation is not included in measures of core inflation, but the latest NFIB small business survey for the US points to higher core price growth as well.

That appears to reflect cost pressures rather than expectations of strong demand, given small business confidence has dropped sharply.

Japan’s economy also appears to be losing momentum as the outbreak there worsens.

Manufacturing production also dropped back in India in November, although the three-month average YoY growth rate nevertheless improved toward zero.

Markets

It was a bit of a nothing day for the headline US stock indices yesterday, but the small-cap Russell 2000 jumped higher again.

Although the headline S&P 500 index hasn’t moved much in recent days, the financials sector has continued to make up for lost ground against the remaining companies - normally a sign of growing investor confidence.

There’s been little clear trend in the Nasdaq either, even though the volume of shares traded in recent days has been unusually high.

Higher real rates had put some pressure on high-growth tech companies since the Georgia run-offs, although that trend reversed yesterday as real rates fell back .

The USD also reversed course and weakened against almost all major currencies. It fell sharply against many emerging market currencies, including a near 3% decline against the Brazilian real. Nevertheless, compared to the start of 2020, the real is still underperforming most other major emerging market currencies.

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