Commodity Rally Adds to Evidence of Stagflation

Building on Friday’s US index gains of 1.2% to 2.0%, US index futures are up 0.2%-0.3%. A catchup rally in Europe today has the Dax up 1.0% and the FTSE up 0.5%. The US 10-year treasury note yield has slipped back under 4.50%.

It’s another big week for corporate earnings with the focus now turning to small and mid cap companies. Investors should note that last week’s talk of an early taper from the Fed, and Friday’s weaker than expected US nonfarm payrolls report and disappointing US ISM Services that rolled back under 50 into contraction territory, that sparked a liquidity rally on hopes of a US rate cut also suggest a worsening US business environment that could have a negative impact on earnings and guidance moving forward.  

Last week Fed Chair Jerome Powell said he couldn’t see any signs of stagflation. He may need new glasses. Friday’s soft nonfarm payrolls and ISM Services highlight the “stag” part” pretty well. The “flation” part can be seen in today’s commodity price action where US Crude Oil is up 1.0%, Natural Gas is up 2.4%, and Copper is up 1.5%. Classic inflation hedges Gold and Silver are up 0.75% and 2.4% so far today.

This week is the heart of earnings season in Canada, headlined by Suncor Energy tomorrow, Shopify and Manulife on Wednesday, Sun Life on Thursday, and Enbridge on Friday. US earnings headliners include Disney Tomorrow, then Uber and AirBnB on Wednesday.

Outside of two central bank meetings, in Australia on Tuesday and the UK on Thursday, along with a smattering of Fed speakers through the week, it’s pretty quiet for economic news. The most notable release is China trade numbers on Thursday which could impact action in China sensitive markets and commodities.

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