Rising commodity prices – global markets

A huge traffic jam at the entrance to California ports. This cork reflects one of the most notable disruptions in world supply. According to reports, there are 35 huge ships inside the ports and another 25 outside, some of which have been waiting 12 days to unload. By comparison, by this time they could have crossed another line of the Pacific. The delay is attributed to a jump in demand for physical products (including the transition from consumer services to goods) along with a shortage of CA, due to illness in Corona.

The economy disconnected from the market – US retail sales excluding fuel, restaurants and vehicles soared in 2020 at the highest rate in years and are expected to continue to soar again this year by 8.1%, Which will be the sharpest rate in 20 years, according to the base scenario of “Consumer growth partners”, under the assumption that the epidemic will be curbed by mid-summer. The strong demand is reflected in both the company reports and the profit forecasts in the US and Asia, which have already returned to their pre-crisis level (in Europe, by the way, are still in the pit). The good results result in the closure of factories, which in turn support the rise in the general yield environment. Those for 10 years in the U.S. rose over 1.2% on Friday.

Will the goods go up?
Rising commodity prices continue to be of great interest. Economist Marco Kolanowitz, from JPM, recently wrote that in the last hundred years the world has experienced four “super-cycles” in commodity prices and estimated that we are now on the verge of a fifth. The last cycle began to be explained in 1996 and ended in 2008, in the economic crisis, and was driven by three main factors: the rise of China, the weakening of the dollar and the introduction of commodities into the public financial portfolios.
1. The 1920s will be a decade of recovery from the corona crisis.
2. Particularly stimulating monetary and fiscal policy.
3. A new cycle of weakening the dollar.
4. High inflation that will also be reflected in commodities.
5. Unintended consequences of environmental policy, which harms capital investments in the fields of energy and production.

Compared to Kolanovich, chairman of the IMF, Giorgiva sees dangers in the 1920s that could lead to a “lost decade” with a “lost generation.” Weak countries According to the fund, developed countries have increased public spending in the past year by 24% of GDP, while developing countries are 6% and poor only 2%. Weak countries fail to vaccinate the population and in Africa only D.Africa and Morocco have begun to vaccinate at all. In addition, poor countries did not participate in the celebration of technology or the Green Revolution. She argues that if 2020 was a year of global closure then 2021 is the year of disengagement whose consequences may come later in the form of instability in the global economy and social unrest.

The futures market is also not betting on a new “turnover” in commodity prices, but more on a temporary rise in prices. Futures on the price of oil embody a drop back to $ 48.

And what is happening in Europe?
In Europe, a surge in electricity tariffs is reported due to an extreme increase in demand associated with an unusual cold wave. The rise in prices will probably not affect inflation for a year, when it subsides when the cold wave passes, but if it continues until the end of winter, it will add more to the base effect of oil and transport prices and lead to a sharp jump in annual inflation in the coming months. Many inflation traders are running with the trend, although it has a high chance of fading afterwards:

There is no doubt that the US administration’s aid programs, which have totaled $ 5 trillion (a quarter of the economy), Pushing for growing demand and short-term inflationary pressures. But it also causes a few other things: businesses to be optimistic and increase capital investment (which is also reflected in raising capital) and high government debt, which guarantees lower future public spending. That is, on the one hand an increase in production capacity and on the other hand a decrease in aggregate demand, a recipe for a price environment decreases in the medium term, when the effects materialize.

Despite the brief warming of inflation, central banks continue to insist on monetary expansion – the Central Bank of Mexico lowered interest rates over the weekend, even though domestic inflation rose above expectations. The bank has signaled an intention to continue with further interest rate cuts at least as long as inflation does not exceed its upper limit of 4%. Which shows that central banks intend to take advantage of the upper limit to continue to support the economy.

January Price Index – Expected to Decrease by 0.3%
Tomorrow, the consumer price index for January will be published in Israel, which is expected to fall by 0.3%, against the background of many external influences, including updates in electricity tariffs, property taxes, car taxes and more. The index will be calculated on the basis of new weights, with the most notable changes being the increase in housing, transport and health items, and on the other hand a decrease in clothing. We must in this context correct in relation to the explanation given on Thursday – the weights were determined as stated on the basis of the consumption survey of the years 2018-19 (and not of 2020), but unusually the CBS tried to make a number of adjustments to change consumption in the corona crisis and use credit card expenditure data. There they identified items that experienced an unusual change (a total of 12% of the index) and across the board accounted for a third of the change in them for a sustainable change in weights. According to the CBS, these weights will be tested on an ongoing basis and it is possible that another weight correction will be carried out in the coming year. The true weight level of 2020 will only be accepted in 2023.

Recall that in our estimation the update of the weights will later lead to a lower inflation figure than would have been obtained had it not been for the change.

On Tuesday, the growth figure for the fourth quarter and for 2020 as a whole will be published in Israel. We expect a contraction of only 2.8%, although in the fourth quarter the economy was under tightening restrictions, such a surprisingly strong figure will support the shekel.

Amir Kahanovitz, is the chief economist of the Excellence Investment House