We've been hearing about the FED's readiness to cut rates since March, keeping
everyone on edge for a potential rally in small-caps, emerging markets, and
more. But now, the word is that the FED might only start cutting in September and that the ECB won't follow their US counterparts and cut earlier...yeah...right.... These economic analysts keep
shifting the goalposts. Any
astute investor would have tuned out the noise and focused on the present and
what's in front of them.
There's a clear message from the bond market if you're willing to see it.
Interest rates are climbing across the board again, and history shows bond
traders are often right. Inflation is rearing its head once more, with rates
hitting new highs over the past five to six months. This isn't a scenario
where central banks will be eager to slash rates.
Look at the ratio between inflation-protected bonds (TIPS) and
non-inflation-protected bonds (IEF) — the ratio is favoring TIPS once again.
I've included the Reuters commodity index to provide insight into the
underlying dynamics. We've consistently highlighted an environment favoring
commodities in an upward supercycle. It's hardly a favorable situation for central banks to start cutting rates.
Commodity stocks are also showing signs of life. Take Freeport-McMoran, the
largest copper producer globally, retesting its 2022 highs. Not surprisingly,
copper has been outperforming since February, making it one of the top assets
in 2024. It's improbable for central banks to consider rate cuts in the current environment.
The trend extends to other commodities — they've been on a tear since
February. Does this point to higher inflation? It's not a certainty, but it's
certainly not a good sign. Neither is it positive for the stock market if things don't stabilize soon.
Because another rate hike could spell trouble for stocks.
What's your take? Will central banks cut rates amid these developments, or should we heed the signals from the bond and commodity markets? Let us know!