Commodities and Inflation Expectations
A soft CPI report provided the boost commodities needed, according to Simmelholt. Despite dovish inflation data, the market seems to be moving towards a re-inflation loop, driven by short-term inflation expectations which show increased right-tail risks. This divergence indicates a potential shift in market sentiment.
Freight Rates and Goods Imports
Freight rates have surged after a steep decline, indicating that market players were waiting for lower prices before making purchases. European and American importers are now stocking up, which could lead to increased goods inflation from May to October. The IMF and Simmelholt both note a lag between freight rates and goods pricing, suggesting that higher costs will be reflected in inflation data soon.
Commodity Prices and Market Dynamics
Commodity prices have rebounded, with 75% of the S&P GSCI up for the year. This contradicts the slowdown narrative and suggests that financial markets have not fully repriced their inflation expectations. Rising freight rates and commodity prices do not align with a disinflationary outlook, reinforcing a bullish stance on commodities.
Impact on European Inflation
Price expectations in Germany, influenced by Chinese trade dynamics, suggest a potential rise in European import prices within a few months. This could delay the ECB's rate decisions in the fall, despite a likely rate cut in June. Simmelholt's inflation model also predicts higher inflation rates, supporting a bearish view on bonds and a bullish stance on sectors like materials and industrials.
Investment Strategies
Simmelholt remains long on oil and broad commodities, expecting more upside through May and June. Although hesitant to trade natural gas due to past failures, the bullish model for Nat Gas suggests potential gains, particularly in the Henry Hub market.
Conclusion
Simmelholt emphasizes the significance of rising commodities and freight rates on global inflation, with a particular focus on European markets. Investors should consider these trends when positioning their portfolios, favoring commodities and inflation-sensitive assets.