Commodity prices have been in a downward trend over the past month, indicating potential weakness in the global economy despite the U.S. stock market bouncing back from recession fears. While the U.S. stock market recovered most of its losses last week, triggered by weak labor and manufacturing data, commodity markets are sending a different signal. The Invesco DB Base Metals Fund is down more than 7% over the past month, and crude oil futures dropped 14% from July 5 through Aug. 5. Analysts like Rob Ginsberg of Wolfe Research are viewing this broad decline in commodity prices as a warning sign about the state of the economy, aside from gold. Copper futures, in particular, are down over 12% in the past month, indicating a shift from earlier expectations of a supercycle driven by demand in electric vehicles and renewable energy.
The narrative of the supercycle in copper, based on expectations of strong demand outpacing supply, has dissipated quickly, according to Bart Melek, global head of commodity strategy at TD Securities. Copper futures have pulled back 21.4% from their 2024 high, with ongoing weakness in China, the second-largest global economy, contributing to the decline. Global manufacturing data has also been lackluster, with expectations of tight markets replaced by the reality of surpluses in copper and oil. China’s failure to provide robust fiscal stimulus has led to reduced bets on a lift in the economy, further impacting commodity markets.
While geopolitical tensions in the Middle East have provided some support for oil prices, weak demand in China continues to weigh on the market. OPEC has lowered its global oil demand growth forecast for this year due to softening expectations in China. Melek believes that energy and base metal markets reflect a slower economic environment with reduced demand growth, mitigating concerns of undersupply conditions. The U.S. has also added to the economic uncertainty by imposing tariffs on Chinese goods, leading to retaliatory measures by Beijing and potentially higher prices for consumers.
The market is eagerly awaiting the latest reading of the consumer price index and commentary from central bankers at the annual meeting in Jackson Hole, Wyoming. A rate cut by the Federal Reserve in September has already been priced in, but the extent of the cut remains uncertain. TD Securities is expecting a 25 basis point cut, although there is a possibility of a larger cut depending on the CPI data. Melek believes that the market may not be overly excited about the rate cut, as uncertainties in the global economy persist and trade tensions continue to escalate. In this environment, commodity markets are reflecting a cautious outlook on the state of the global economy.
