Inflation has been a hot-button issue in the financial markets for many months now, but there are signs that it might finally be slowing down.
Lumber prices are now down roughly 50% since March—a clear sign that a demand surge driven by a red-hot U.S. housing market has lost some steam.
The U.S. Federal Reserve has been aggressively raising interest rates in 2022 to help combat rampant inflation (i.e. rapid growth in prices). The cooling of lumber prices is a good sign, but there are others, as well.
The price of palm oil—one of the world’s most widely used cooking oils—has also cooled off in recent weeks. In the cooking oil sector, palm oil accounts for roughly 37% of annual global consumption.
Last month, the world’s largest producer of palm oil—Indonesia—banned the export of palm oil due to supply shortages and rising costs at home. However, on May 23, Indonesia announced it was reversing that ban, a critical development for a global market that’s been running short on supply.
As seen in many commodities markets during the last 12 months, palm oil prices has dramatically increased during the last couple of years. In April 2020, a ton of Indonesian palm oil traded for roughly $550, but prices rose all the way to $1,700 only two years later. In the last couple weeks, palm oil prices have retraced back to $1,500/ton.
While that’s still roughly triple the price observed in April 2020, recent market activity suggests that inflation may have peaked—at least in the palm oil market.
Recent sales data from the U.S. housing market appears to underscore the slowdown in inflation. In May, new home sales fell roughly 19%, dropping to levels not seen since April of 2020. Moreover, Redfin reported that nearly 20% of the homes listed on its platform experienced a price cut in the last month.
Due to the Fed’s aggressive rate-raising campaign, mortgage rates are now above 5%, which represents a 13-year high. Rising mortgage rates were widely projected to serve as a headwind for the housing market because 30-year home loans cost hundreds of dollars more per month with rates above 5% (as compared to 2.70%, where they started in 2022).
It’s no coincidence that lumber prices, palm oil prices and U.S. housing prices are all dropping simultaneously. Inflation has undoubtedly cooled, but it’s still not clear where prices will ultimately settle, or whether the energy sector will join the club.
Unfortunately, energy prices bucked the broader trend in Q2 and are still on the rise.
Since May 19, crude oil prices have rallied roughly 15%, and are currently sitting near the high of the year. Natural gas prices have also rallied over that period, but in a more moderate fashion. Natural gas is currently trading $8.67/MMBtu, which represents an increase of roughly 8% since May 19.
While that’s certainly not a good sign for inflation, one has to keep in mind that the energy sector is basically trading in a vacuum as a result of the ongoing war in Ukraine.
In response to Russia’s expanded invasion of Ukraine, many countries decided to boycott Russian energy exports. While those efforts should help to constrict Russia’s economy, they have also removed critical supplies from the oil and gas markets, and prices have responded accordingly.
Energy prices probably won’t reverse course until there’s some type of resolution to the Russian-Ukrainian war (i.e. a truce or ceasefire), or if some new sources of supply come online.
The United States government is currently exploring a deal with Venezuela to increase its crude oil production capability. Venezuela controls the world’s largest reserves of crude oil, but is currently producing less than 1 million barrels per day due to political instability in the country.
Another source of fresh supply would be the Organization of Petroleum Exporting Countries, or OPEC. But it’s closely aligned with Russia and has thus far been disinclined to ramp up crude oil production in any material way.
Taken together, the above suggests that consumers may be feeling some relief in their monthly budgets. The only exception is at the gas pump, where prices could remain elevated for several more months.
Politicians in Washington, D.C. are also considering reversing some of the tariffs levied on Chinese goods during the previous administration. Such a shift could also provide consumers with a significant victory, as tariffs essentially make goods and services more expensive.
To learn more about how inflation has affected the financial markets, review a recent episode of Truth or Skepticism on the tastytrade financial network.
To follow everything moving the markets this summer, tune into TASTYTRADE LIVE.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.