July 2021

Higher Commodity Prices Signal Global Growth Recovery – Commodity Overview

Rising demand for commodities worldwide has induced higher prices for crude oil, natural gas, gasoline and copper. Essential commodities for food products including wheat, corn, and soybeans have risen sharply in price, translating to higher consumer food costs.

Key commodity prices have risen steadily over the past few months, considered by economists as inflationary and possibly as a sign of an economic recovery. Commodities such as crude oil, gold, corn, and wheat have risen globally, as transportation and production bottlenecks have hindered supplies. The global pandemic is thought to be the primary culprit for constraints leading to higher prices.

Even though global economic expansion has slowed since the onset of the pandemic, the Worldbank estimates that vaccinations worldwide will help revive and stimulate expansion, primarily in the emerging economies. The Worldbank expects the global economy to expand by 4% in 2021, assuming that initial COVID-19 vaccinations reach hundreds of millions worldwide. In addition to widespread vaccinations, investment-enhancing reforms are essential to help expand the global economy. Excluding China, emerging market and developing economies are forecast to expand 3.4% in 2021 after a contraction of 5% in 2020. Among low-income economies, activity is projected to increase 3.3% in 2021, following a contraction of 0.9% in 2020.

Sources: worldbank.org, Federal Reserve

How Inflation Creeps Up On Consumers – Consumer Behavior

Over the past year, global economies went from a slow expansion at the beginning of 2020, to an abrupt halt with the onset of the pandemic in March 2020. Supply chain bottlenecks have become rampant as increasing demand has evolved from a slowly recovering global economy.

A lack of critical components for everything from automobiles to cellular phones brought about production shortages that led to decreases in supply simultaneously as demand fell across the globe. As demand has begun to rekindle, shuttered factories and supply chains have not been able to keep up with rising demand, resulting in order backlogs and higher prices. Some economists believe that current inflationary pressures may be temporary until production ramps up to meet current demand, while others believe that higher prices have become permanent for many products in order to maintain delicate margins.

Source: Bureau of Economic Analysis

Equity Indices Post Positive Second Quarter – Domestic Equity Markets

The 2nd quarter ended positively for major global indices, with the S&P 500 index posting gains for 10 of the 11 sectors. Top performing sectors for the quarter included technology, communications, healthcare, and financials.

The SEC said that it is closely monitoring frantic moves in the market caused by memes to determine if there have been any market disruptions, manipulative trading or other misconduct. It also said that it will act to protect retail investors if violations of federal laws are found.

Inflation, higher taxes, and the Delta variant are the focal point of concern for equity markets, especially at recent new highs. There is some momentum in revenue & earnings growth for particular sectors, but not on a broad level.

Sources: S&P, SEC, Bloomberg

Rates Cease Upward Trend – Fixed Income Update

Treasury bond yields stabilized in the 2nd quarter after rising earlier in the year. Short-term rates rose slightly resulting in a flattening yield curve, an indication of possible slower economic growth as the Fed considers raising rates higher.

Comments by St. Louis Federal Reserve member James Bullard indicated that the Fed may start increasing rates in 2022 via buying fewer bonds through their asset purchase program. A scale back on mortgage bond purchases is expected to occur initially before pullbacks on other government bonds.
Rates on mortgages stood steady at 2.98% for a 30-year fixed conforming loan as of July 1, 2021 as posted by FreddieMac. Other consumer loans also held steady as the Fed deliberated on possible future rate increases.
Source: U.S. Treasury, Federal Reserve, FreddieMac

Dollar Share Of Global Exchange Reserves Drops To 25 Year Low – Currency Market Update

For decades the U.S. dollar has been the most dominant of the reserve currencies in the world. The liquidity and transparency of the dollar versus other world currencies has made it the primary reserve currency for foreign governments and international trading entities.

Dollar supremacy has recently become more challenged as the U.S. struggles with a growing budget deficit and expanding Treasury debt, which can put downward pressure on a country’s currency. A weakening dollar may also become inflationary for U.S. consumers by limiting purchasing power as well as increased borrowing costs for the U.S. government.

The most recent data compiled by the International Monetary Fund (IMF) show the U.S. dollar representing 59% of global exchange reserves, down from 65% in 2016 and the lowest in 25 years. Other expanding economies, such as China’s, have seen their currency gradually increase as a reserve currency status over the past few years.
Sources: IMF Currency Composition of Foreign Exchange Reserves, Federal Reserve