(Kitco News) With markets primarily driven by changes in the Federal Reserve's rate hike expectations, investors need to pay close attention to oil. Lower crude prices might be the number one requirement for a shift in the central bank's monetary policy direction, said Bloomberg Intelligence.
"That the Federal Reserve is intensifying tightening despite rapidly deflating stock and bond markets might suggest more powerful leading indicators are necessary," wrote Bloomberg Intelligence's senior commodity strategist. "Top catalysts for a Powell pivot? Lower commodities, crude oil."
Crude is still up around 13% year-to-date. "Accelerated reversion of the 1H crude-oil price spike that pumped inflation and Fed rate hikes could be a prerequisite for the Fed to pause," McGlone wrote in a report Monday.
Commodities, in general, are an excellent leading inflation indicator, especially crude oil.
In comparison, copper and the S&P 500 are down over 20% year-to-date. A similar drop in crude oil might be needed for the Fed to slow its tightening path, McGlone pointed out. The last two Fed pivots coincided with sharp declines in crude oil in 2018 and 2020, he added.
And looking into next year, the outlook on commodities is not optimistic, which favors the Fed pivot argument, according to Bloomberg Intelligence.
"The global tilt to recession and plunging money supply may indicate a rug-pull for commodity prices. If commodities don't do what's normal -- drop to relatively too cold levels -- after the too hot period in 1H, it's more likely inflation could remain sticky and central banks will keep tightening," McGlone wrote. "A primary indicator of lose-lose for commodity prices -- plunging world money supply."
The report compared its commodity outlook to 2008, warning that commodity prices are still in the early stages of a major selloff.
"What's different this time is the unprecedented spike in U.S. money supply to the 2021 peak that's plunging. We see parallels in the trajectory of commodity prices akin to 2008," McGlone said. "The crisis is global vs. U.S.-centric during the financial crisis, and the Fed is tightening aggressively. If commodities keep falling, it may be a top force to curtail central-bank restraint."
