So far, 2024 is shaping up to be a year that’s anything but predictable as confounding inflation data continues to challenge US markets. Could a stubborn Consumer Price Index (CPI) push more investors towards a metals revival?
With February 2024 CPI data reported by the Bureau of Labor Statistics showing a 3.2% year-on-year increase that outpaces both forecasts and the 3.1% recorded in January, it’s clear that expectations of a dovish Federal Reserve monetary policy in the first half of this year have all but evaporated.
Worryingly, month-on-month inflation rose 0.4%, representing an acceleration on January’s 0.3% pace. But what do these figures mean for institutions and the pursuit of value investments in 2024?
“These inflation numbers presage a rockier period ahead for the Fed,” explained Eswar Prasad, professor of trade policy at Cornell University.
“Although the US economy has held up well so far, there is a risk that persistent inflation and the Fed’s response to it might turn a soft landing scenario into a soft stagflation one.”
The US economy’s drawn-out battle to slow inflation will directly impact monetary policy, with the expectation that rates will remain between 5.25% and 5.5% in the short term at least, with a more clouded view of how many cuts will be on the way in 2024.
As tussles for market control continue to hamper the US, metals have been buoyed by positive international sentiment, prompting a more positive outlook for metals CFDs. With this in mind, could it be worth investors looking to metals as a safer alternative to the increasingly uncertain domestic markets?
‘YOLO’ Consumers Drive Market Opacity
Driving US inflation rates is the Consumer Spending Index, which has continued to confound economists even as the cost-of-living continues to rise domestically.
“There is no acknowledgment today that, yet again, we have a super-duper credit bubble on our hands,” said renowned economist David Rosenberg in February. “It isn’t just about fiscal recklessness at the government level; the dilemma is that the consumer commands a dominant 70% share of the economy.”
The data behind consumer spending is worrying. US households today have a savings rate of 3.7%, which weighs in far lower than the historical average of 9%. In addition to this, consumer spending reached $208 billion in Q4 2023, indicating an unsustainable level of borrowing.
This ‘YOLO’ approach to spending has helped to keep industry flourishing in the US, and the Q4 expectation of Fed rate cuts created a prosperous economic environment that saw the S&P 500 post a strong end to 2023.
However, this high rate of spending is likely to cool at a rapid pace when credit card bills begin to pile up and inflationary pressures keep the Fed’s rates high. As a result, the coming months could prove to be challenging for the US economy.
Charting the Resurgence of Metals
Both precious metals and base metals have performed well in recent months for different reasons. As a global commodity, their growth has been facilitated by advantageous market conditions across international economies.
Although gold has been an inconsistent inflation hedge when conditions become challenging in the US, its low levels of correlation to stocks and bonds make it an excellent option for diversification during periods of uncertainty.
In fact, gold reached an all-time high value of $2,195 per ounce in early March, representing a 12-month gain of 19%. However, its rip-roaring success has been attributed to international safe haven investing, with economies like that of the United Kingdom, Germany, Japan, and China all battling against growth projections of under 1% and economic instability.
For base metals like copper, weakening economic outlooks are typically a bad sign. Inflationary pressures, in particular, can tighten production and cause demand to fall. However, the price of copper soared to its highest level in seven months recently as Chinese smelters agreed to a joint production cut.
With China responsible for producing half of the world’s mined copper, the production cuts saw a fundamental shift in investor appetite. In addition to this, there is plenty of evidence of resilience for the metal in the face of economic uncertainty.
Analysts suggest copper prices could rally more than 75% over the coming two years owing to supply disruptions and the push for renewable energy.
Specifically, a recent report by BMI found that growing demand amid the green energy transition and a prospective decline in the value of the US dollar in the second half of 2024 could see copper prices grow significantly.
This could see more institutions identify opportunities within metals CFDs that offer tailored liquidity solutions to build bespoke coverage of the specific commodities that hold the best potential in highly dynamic global macroeconomic conditions.
Can Institutions Rely on Metals CFDs?
Because Contracts for Difference (CFDs) derive their value from the movement of underlying assets, picking up CFDs for metals at a time when growth expectations can be buoyed by international market conditions can be advantageous for institutional investors.
As the US continues to battle stubborn inflation rates, the prospect of a metals CFD can help investors diversify away from domestic markets that could be vulnerable to uncertainty and refocus their approach on global commodity markets.
Although it can be difficult to chart just how the ‘YOLO’ runaway CPI run will end, looking to metals could help to bring greater stability and sustainability for institutional investments when unpredictability reigns supreme.
