Commodity prices head higher

Good news for several currencies

Chart of the Day

It was a strong day for commodities across the board, with the highest rises of near 5% for oil and almost 6% for gasoline following the decision by Saudi Arabia to cut its oil production targets. The gains elsewhere appeared to reflect stronger expectations for global growth more generally, with platinum and palladium making up for their weakness on Monday and the ags all continuing their near-vertical marches higher.

Macro

The ISM manufacturing index aided the positive sentiment, surprising sharply to the upside and rising to its highest since 2018, and nearly its highest in 15 years. Goods demand is continuing to benefit from reduced services demand due to the pandemic, thereby benefitting the manufacturing sector.

The same theme was clear in Germany, where retail sales (i.e. sales of goods) surged again in November - in contrast to expectations for slower growth and also at odds with the recent declines in consumer confidence.

The eurozone data showed money supply growth is keeping pace with that in the UK and China, but all three have lagged behind the US.

Markets

The decision by Saudi to cut its oil production pushed WTI above $50 for the first time since the pandemic began.

That was a boon for the energy sector of the S&P 500, which rose by over 4%, while materials companies also did strongly.

Rising commodity prices have also been good news for several emerging market equity indices. That said, other trends are clearly are work given that India, which does not export commodities to the same degree as Mexico or Brazil, has kept pace with those countries since October.

Rising commodity prices continue to lift inflation expectations, with the 5-year/5-year US inflation breakeven rate now at 2.04%, the highest since a brief spike in early 2019. They were heading higher in Asia trading as betting markets leaned toward Democratic victories in both the Giorgia Senate run-off races.

Higher breakevens have manifested themselves more in lower real rates than higher nominal yields. Although nominal yields have been rising, they remain lower than their late-2020 highs - that said, the 10-year seems on track to rise above 1%, which could raise a few eyebrows at the Fed.

Likewise, higher commodity prices have helped lift the advanced-economy commodity currencies. The AUD, NZD and CAD all rose by near 1% against the US yesterday, and are now all higher than they were at the start of 2020.

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