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What commodity prices are telling us about the economy

The commodity markets include everything from oil to copper to agricultural products. Katy Kaminski, AlphaSimplex's Chief Research Strategist tells Yahoo Finance Live what signals these markets are signaling about the global economy.

Video transcript

- What does the weaker than expected export data that came out of China signal about some of the commodities price action that we may see in the near term now?

KATY KAMINSKI: So you've seen, particularly in the industrial metals like copper and energies, you've seen a decrease in price recently, particularly since this narrative came about. You've also seen weaker signals in Asian equities than you have-- with the exception of Japan, let's just be honest. And so we're definitely seeing those trends in the markets that we follow that you're clearly seeing that some of that is coming into prices, which also can help the inflation data, until it doesn't.

- And it's not just energy, right? I know that you're watching some of the other commodity prices, and I think you mentioned iron ore that was something that you were looking at. So it's not as though we're seeing commodity prices across the board go off a cliff or anything like that, we've seen them kind of rangebound in the case of oil prices. But what are you seeing elsewhere? And what does that indicate to you?

KATY KAMINSKI: So I think when people have been asking me, what are the biggest trends? I've said long stocks, short bonds, short commodities. And the short commodity trade has really looked like a recessionary trade. And what's been interesting in the last, say, two weeks, as risk gone has come back into the markets perhaps as some ease on that demand narrative you just talked about, you've started to see big moves in some of the commodities. Iron ore was up about 8% since the beginning of this month, and that's a pretty big jump. We've also seen energies coming back after they've been under some pressure but also rangebound in more recent periods.

So you're definitely seeing commodities move in the other direction for the first time in the last two weeks that we haven't seen.

- Why hasn't this had a bigger effect on inflation? I mean, the longer term trend, decline in commodities. And I know they're transitory, and it takes them a while to feed through to stuff. Is it just that upward pressure on wages is so persistent? Like, what's going on there?

KATY KAMINSKI: So we talk we were talking a lot about inflation during this entire narrative, since 2020. And what's really scary about inflation is that it moves. So it's started in the commodity sector, it moves to another part of the economy. And then sometimes, it moves back.

So that's what we have to think about when we deal with inflation is that price pressure goes from one area to another, and it basically right now it may not be in the commodities but it could come back and then you have again these cycles where you end up with commodity super cycles, which have this dampening and magnifying effect on other parts of the economy. And that's why I always like to look at them as the first mover until you get another wave. So watch them for that in terms of if you want to see another wave. Having higher oil prices would have the potential to do that as well.

- Yeah, no, thank you.

- Exactly. Is there a commodity, though, that you would look to outlast even the super cycles that you're talking about that has fared best in previous kind of waves that you've monitored?

KATY KAMINSKI: Oh, that's a good question. I mean, I think some of the more diversifying commodities are a little different. So we've seen definite waves in agricultural commodities, we've seen very interesting waves in the industrial metal sector, such as copper that's been very linked to China. But you also see energy is something that I think that's one to watch, because that's one that everybody's really paying attention to. I mean, we were talking about GameStop.

If there's a commodity that investors care about, it's oil. So I think that's probably the one to start looking at first to see if that type of move could actually accelerate.

- So to kind of put everything together here and kind of distill what you've been talking about, so you're recommending along in US equities. Short fixed income if I'm understanding you correctly. Within equities, are there particular areas that are more and less attractive?

KATY KAMINSKI: Well, if you look at the recent trends, the markets that have actually been up the most are things like the NASDAQ, so tech, but you're also seeing sort of a catch up effect in small caps. So the Russell 2000 has been up quite a bit this month as an example. What we've really seen is this fervor for equities that has come back in the face of a potential pause, so that has been a very strong momentum signal in the markets.

When you think about fixed income, I tend to be the sort of contrarian there with fixed income. I believe that during rising rate environments until we have a steeper curve, you need to be very careful about holding long-term debt because long-term debt is very susceptible to inflation. If you have any views that inflation might stick around longer, I would be a little careful with fixed income.

- Yeah, unfortunately for all of us on the inflation front. Katie, thanks so much for coming in. It was so good to see you in person.

KATY KAMINSKI: Thanks for having me.

- I really appreciate it. Katy Kaminski is AlphaSimplex's Chief Research Officer, Chief Research Strategist, and Portfolio Manager. Thanks, Katie.