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  • Commodity prices take a sharp hit from the coronavirus
  • U.S. CPI expected to show little change as inflation expectations remain tepid
  • Treasury’s refunding operation concludes with 30-year T-bond auction

Commodity prices take a sharp hit from the coronavirus
 — The broad commodity indexes have taken a sharp hit so far in 2020 mainly because of the coronavirus that emerged as a major problem since mid-January.

Commodity prices have also been undercut by the sharp 2.7% year-to-date rally in the dollar index.  The rally in the dollar index has been driven by (1) capital flight into the dollar due to the coronavirus, (2) the Fed’s insistence that no further rate cuts are necessary despite the coronavirus, and (3) weakness in the euro with the Eurozone economy barely holding its head above water and with political uncertainty in Germany, Ireland, and Italy.

The Bloomberg Commodity index is currently down by -7.1% on a year-to-date basis.  The index has recovered just mildly from the 4-year low posted in early February.  

The coronavirus has affected the individual commodity sectors in different ways.  Gold, for example, has rallied sharply by +2.7% year-to-date on safe-haven demand and ideas that China’s central bank will be forced to significantly boost its monetary stimulus to support the economy.  Other global central banks are also seeing pressure to extend their extraordinarily easy monetary policies to help their economies ride out the negative impacts from the coronavirus.

The increase in global safe-haven demand for gold has outweighed the negative factor of a drop in jewelry demand for gold due to the shutdown of two-thirds of China’s economy for two weeks and the sharp drop in travel in Asia.

The surge in gold buying in January can be seen by the fact that the amount of gold held in ETFs rose to a new record high of 2,592.4 metric tons on Tuesday, the most since the data series began in 2002.

While gold has seen strength, industrial metals prices have taken a sharp hit on the coronavirus since Chinese demand has plummeted with the extended company shutdowns on the coronavirus.  March copper, for example, is down by -7.1% on a year-to-date basis.

Petroleum prices have taken the biggest hit of all with estimates that China’s crude oil demand has plunged by 20% due to the economic shutdown on the virus.  Also, OPEC+ has been unable to cut production to prevent a surge in the global oil surplus because of foot-dragging by Russia.  April Brent crude oil prices have plunged by -14.1% on a year-to-date basis and WTI crude oil temporarily dipped below the psychological level of $50 per barrel.

Meanwhile, agricultural prices have seen less severe drops since food demand has not been significantly affected by the coronavirus.  Still, the rally in the dollar has hurt agriculture prices, along with talk that the China coronavirus means that China will delay its purchases of U.S. agriculture products under the US/China phase-one trade deal.

The Bloomberg Livestock sub-index has fallen by -11.1% year-to-date, the Grains sub-index has fallen by -3.5%, and the Softs sub-index has fallen by -2.6%.

U.S. CPI expected to show little change as inflation expectations remain tepid — The consensus is for today’s Jan CPI to edge higher to +2.4% y/y from Dec’s +2.3%, but for the Jan core CPI to edge lower to +2.2% y/y from Dec’s +2.3%.  

Market expectations for inflation over the next 10 years dropped in January due to the damage being done by the coronavirus to the global economy and to the commodity markets in particular.  The 10-year breakeven inflation expectations rate is currently at 1.67%, down by -17 bp from the 8-3/4 month high of 1.84% seen in early January before the coronavirus emerged as a major problem.

The fact that 10-year inflation expectations are only at 1.67% indicates that a Fed rate hike is a long way off.  The Fed in recent months has started stressing that its 2% inflation target is symmetrical, which means that inflation could temporarily rise mildly above 2% and the Fed would not respond with a rate hike. With tepid global economic growth and commodity prices taking a big hit from the coronavirus, there seems to be no medium-term prospect of inflation climbing even to 2%, let alone above 2%, leaving a rate hike for inflation reasons a long way off.

Treasury’s refunding operation concludes with 30-year T-bond auction — The Treasury today concludes its $84 billion refunding operation by selling $19 billion of new 30-year T-bonds.  The $19 billion size of today’s 30-year T-bond auction is unchanged from the last five refunding operations.

The 30-year T-bond yield dropped with the rest of the Treasury curve during January due to the global economic damage being done by the Chinese coronavirus.  The 30-year T-bond yield on January 31 fell to a 5-1/4 month low of 1.99% but has since rebounded mildly higher by +10 bp to the current level of 2.09% due to the reduced concern about the coronavirus illustrated by the rally in U.S. stocks to new record highs.

The 12-auction averages for the 30-year are as follows:  2.28 bid cover ratio, $9 million of non-competitive bids, 5.5 bp tail to the median yield, 61.5 bp tail to the low yield, and 59% taken at the high yield.  The 30-year is a little below average in popularity among foreign investors and central banks.  Indirect bidders, a proxy for foreign buyers, have taken an average of 59.3% of the last twelve 30-year T-bond auctions, which is mildly below the median of 60.1% for all recent Treasury coupons.

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