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  • Writer's pictureMatheus Zani

The Runaway Commodity Train Raises Inflation Fears

Investors and companies are entering the second quarter of 2021 with a more positive outlook. As summer approaches, optimism returns, with vaccine rollouts in several large developed economies buoying the global market in the hopes of sustained re-openings around the world. Also, with economic activity accelerating moderately in 2021, millions of new jobs have been created. However, life remains uncertain with the ever-present Covid-19 pandemic continuing to claim lives, particularly in India, Brazil, and Japan.

Leading economic indicators such as purchasing manager indexes show that an economic recovery is on course. In the U.S., the Market Composite PMI Index printed 62.2 in April (Fig. 1), up from 59.7 in March, reaching the highest level since data collection began in October 2009. The upturn seen was supported by increases in services and manufacturing production amid more permissive pandemic measures and the reopening of many service sector businesses.

Figure 1. U.S. PMI Indexes. Source: Markit and Haver Analytics

Similar to the U.S., Eurozone Market PMI also posted upbeat readings (Fig. 2), with the Composite Index jumping from 53.2 in March to 53.7 in April. Manufacturing output grew for the tenth straight month, expanding at a rate unsurpassed in over two decades of survey history.

Nonetheless, both regions, manufacturing production was weighed down by difficulties sourcing raw materials and semiconductor components, as well as ongoing supplier delivery delays.

Figure 2. Eurozone PMI Indexes. Source: Markit and Haver Analytics

Bond markets have also priced in this ongoing economic recovery. For instance, the Benchmark 10-year nominal yields have been increasing and yield curves have been steepening since early 2021. However, this trend lost a bit of steam in April, after declining from its highest level at 1.74% at the end of March. Markets have started to price in a lower inflation risk after prices were not surging as previously thought, as well as the risk of the Fed being forced to tighten its monetary policy faded on the way, despite seeing a clear sustained economic recovery.

As a result of U.S. yield weakening, the Dollar Index which tracks the U.S. dollar against a basket of major currencies slid 2.5% during April (Fig. 3).

Figure 3. Dollar Index (blue line, right) vs. US 10-year yield (orange line)

At the same time, the recovery in commodity prices continued throughout April, with energy, metals, and agriculture indexes regaining their pre-Covid levels. The surge in oil prices that followed the Covid-19 pandemic crisis was a result of a brighter outlook. However, concerns of surging Covid-19 cases and renewed restrictions in India will drive down fuel demand in the world’s third-biggest oil importer.

Soft and metal commodities, particularly lumber, wheat, and copper, have also seen sharp rises during April (Fig. 4). Most notable are copper prices, which were over 58% higher in April 2021 relative to the end of 2019. The recovery has been driven by the improving global economic outlook, notably due to higher demand from China, as the country continued to boom in April from the record growth in the first quarter, with continued Chinese government stimulus measures, increased infrastructure spending, and improved construction and manufacturing activities.

Figure 4. Commodity Price Indexes. Source: Worldbank

Looking ahead, higher commodity prices are a further sign that inflation is set to rise this year. This could refuel expectations that the Fed will tighten its monetary policy in the near term, which might warm up the soft U.S 10-year yield once again and provide important support to the USD.

Furthermore, the market may be missing out or just ignoring it temporarily, but armed and diplomatic conflicts are springing up across the globe. Three focal tensions are bubbling away at present: (1) between China and Taiwan; (2) the continued build-up of Russian troops on the Ukraine border; and (3) renewed tensions between Iran and Yemen. Regardless of the outcome, investors might seek refuge in safe-haven assets, such as the USD.

May’s Economic Calendar


On Monday (05/03): ISM Manufacturing PMI (Apr)

On Tuesday (05/04): Trade Balance (Mar)

On Wednesday (05/05): ADP Nonfarm Employment Change (Apr) | Services PMI (Apr)

On Friday (05/07): Nonfarm Payrolls (Apr) | Unemployment Rate (Apr)

On Monday (05/10): CB Employment Trends Index (Apr)

On Tuesday (05/11): OPEC Monthly Report | JOLTs Job Openings (Mar)

On Wednesday (05/12): Consumer Price Index (Apr) | Federal Budget Balance (Apr)

On Thursday (05/13): Producer Price Index (Apr)

On Friday (05/14): Retail Sales (Apr) | Industrial Production (Apr) | Manufacturing Production (Apr) | Michigan Consumer Sentiment (May)

On Tuesday (05/18): Building Permits (Apr) | Housing Starts (Apr)

On Monday (05/31): National Holiday - Memorial Day


On Monday (05/03): German Retail Sales (Mar) | EZ Manufacturing PMI (Apr)

On Wednesday (05/05): EZ Composite PMI (Apr) | EZ Services PMI (Apr) | EZ Producer Price Index (Mar)

On Thursday (05/06): German Factory Orders (Mar) | EZ Construction PMI (Apr) | EZ Retail Sales (Mar)

On Friday (05/07): German Current Account Balance n.s.a (Mar) | French Industrial Production (Mar) | French Trade Balance (Mar)

On Monday (05/10): Sentix Investor Confidence (May)

On Tuesday (05/11): German ZEW Current Conditions (May) | German ZEW Economic Sentiment (May) | EZ ZEW Economic Sentiment (May)

On Wednesday (05/12): EZ Industrial Production (Mar) | German Consumer Price Index (Apr)

On Tuesday (05/18): EZ GDP (Q1) | EZ Trade Balance (Mar)

On Wednesday (05/19): EZ Consumer Price Index (Apr)

On Thursday (05/20): Current Account (Mar)


On Monday (05/03): Bank Holiday

On Tuesday (05/04): BoE Consumer Credit (Mar) | Manufacturing PMI (Apr) | M4 Money Supply (Mar)

On Thursday (05/06): Services PMI (Apr) | Composite PMI (Apr) | BoE Interest Rate Decision (May) | BoE QE Total (May)

On Friday (05/07): Construction PMI (Apr)

On Monday (05/10): Halifax House Price Index (Apr) | BRC Retail Sales Monitor (Apr)

On Wednesday (05/12): Business Investment (Q1) | Construction Output (Mar) | GDP (Q1) | Industrial Production (Mar) | Trade Balance (Mar) | RICS House Price Balance (Apr)

On Tuesday (05/18): Unemployment Rate (Mar)

On Wednesday (05/19): Consumer Price Index (Apr) | Producer Price Index (Apr) | Raw Price Index (Apr)

On Thursday (05/20): CBI Industrial Trends Orders (May)

On Monday (05/31): Bank Holiday


On Monday (05/03): National Holiday - Constitution Day

On Wednesday (05/05): Services PMI (Apr)

On Monday (05/10): Household Spending (Mar)

On Wednesday (05/12): Coincident Indicator (Mar) | Leading Index (Mar) | Bank Lending (Apr) | Current Account n.s.a. (Mar)

On Thursday (05/13): Economy Watchers Current Index (Apr) | M3 Money Supply (Apr)

On Sunday (05/16): Producer Price Index (Apr)

On Monday (05/17): GDP (Q1)

On Wednesday (05/19): Capacity Utilization (Mar) | Industrial Production (Mar) | Reuters Tankan Index (May) | Core Machinery Orders (Mar) | Trade Balance (Apr)


On Monday (05/03): Manufacturing PMI (Apr)

On Tuesday (05/04): Building Permits (Mar) | Trade Balance (Mar)

On Friday (05/07): Employment Change (Apr) | Ivey PMI (Apr)

On Friday (05/14): Manufacturing Sales (Mar) | Wholesale Sales (Mar)

On Monday (05/17): Housing Starts (Apr) | Foreign Securities Purchases (Mar)

On Wednesday (05/19): Consumer Price Index (Apr)

On Thursday (05/20): Bank of Canada Press Conference

On Monday (05/24): National Holiday - Victoria Day

On Monday (05/31): Current Account (Apr) | Producer Price Index (Apr)


On Monday (05/03): Manufacturing PMI (Apr)

On Friday (05/07): Consumer Price Index (Apr) | Consumer Confidence (Apr)

On Tuesday (05/11): Gross Fixed Investments (Feb)

On Wednesday (05/12): Industrial Production (Mar)

On Thursday (05/13): Interest Rate Decision (May)

On Monday (05/24): Mid-Month Consumer Price Index (May)

On Tuesday (05/25): Current Account (Q1) | Trade Balance (Apr)

On Wednesday (05/26): Economic Activity (Apr) | GDP (Apr)

On Thursday (05/27): Unemployment Rate (Apr)


On Monday (05/03): Caixin Manufacturing PMI (Apr)

On Wednesday (05/05): Caixin Services PMI (Apr)

On Thursday (05/06): Trade Balance (USD) (Apr) | FX Reserves (Apr)

On Monday (05/10): Consumer Price Index (Apr) | Producer Price Index (Apr)

On Thursday (05/13): Foreign Direct Investment (Apr)

On Sunday (05/16): House Prices (Apr) | Industrial Production (Apr) | Retail Sales (Apr)

On Monday (05/17): Unemployment Rate (Apr)


On Monday (05/03): IPC-Fipe Inflation Index (Apr) | Markit Manufacturing PMI (Apr) | Trade Balance (Apr)

On Tuesday (05/04): Producer Price Index (Mar)

On Wednesday (05/05): Industrial Production (Mar) | Markit Composite PMI (Apr) | Markit Services PMI (Apr) | Interest Rate Decision

On Friday (05/07): IGP-DI Inflation Index (Apr) | Retail Sales (Mar)

On Tuesday (05/11): Consumer Price Index (IPCA) (Apr) | COPOM Minutes

On Wednesday (05/12): Service Sector Growth (Mar)

On Tuesday (05/25): Mid-month Inflation (IPCA-15) (May)

On Wednesday (05/26): Current Account (Apr) | Foreign Direct Investment (Apr)

On Thursday (05/27): Unemployment rate (3-months)

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