Since this year, global inflation has intensified and a number of central banks around the world have joined the tide of raising interest rates. It is reported that more than 20 central banks have raised interest rates more than 60 times this year.

After India and Australia started a new interest rate hike cycle again last week, the European Central Bank also recently released a signal to raise interest rates. On June 9, local time, the European Central Bank announced its interest rate resolution, maintaining the three key interest rates unchanged. At the same time, it decided to terminate the net asset purchases under its asset purchase programme from July 1. It plans to raise the key interest rate by 25 basis points at its monetary policy meeting in July and to raise interest rates again in September. It is understood that if the ECB raises interest rates in July this year as expected, it will be its first rate hike in a decade. ECB President Lagarde said that if inflation forecasts for 2024 remain at current levels or higher in September, then a rate hike of more than 25 basis points would be possible at that time.

So what will happen to commodity markets as a new wave of widespread global interest rate hikes begins?

Represented by the Fed's interest rate hike, US inflation continued to hit a 40-year high of 8.6% year-on-year in May, also exceeding expectations of 8.2%. As it stands, US housing inflation has become a major driver of core inflation, with the most heavily weighted component - rent increases - lagging house price increases by about a year and a half and is expected to remain fairly firm. The year-on-year level of core CPI in the U.S. is expected to remain quite high throughout 2022, enough to support successive Fed rate hikes. Against a backdrop of relatively certain inflation and tightening, the growth outlook may become key to the deal, triggering an increased likelihood of recessionary trading, with a half-year slowdown in the US economy and a recession next year hardly in doubt.

At the same time, with the Fed's interest rate hike, countries other than the US will also be under greater pressure, arguably undermining global aggregate demand. Overall, the United States is under recessionary pressure, with high inflation constraints on the Fed's monetary policy, then from the perspective of asset pricing, valuations do not expand, and earnings down, risk asset prices naturally have downward momentum. Therefore, commodity markets may be at risk of falling under recession expectations.

The beginning and advancement of the Fed's interest rate hike cycle will undoubtedly have an impact on commodities. Since March this year, the Fed tightening is a rare historical synchronization of "interest rate hikes + balance sheet shrinking ". From the perspective of liquidity, under the background of setting “control inflation and strictly prevent stagflation” as the core objective, the tightening cycle of raising interest rates is expected to have relatively strong impact on commodities.

If two rounds of “interest rate hikes + balance sheet shrinking " in 2000 and 2018 have triggered a fall in commodities sooner or later, there is even more reason for commodities to be under pressure due to liquidity in this round, given the degree, pace and scale of this round of "interest rate hikes + balance sheet shrinking ".

In general, after the Federal Reserve officially began the 'interest rate hikes + balance sheet shrinking ' cycle, there would be downward pressure on the commodity market in the long term due to tightened liquidity. In the medium term, the contradiction in market trends will be dominated by supply and demand fundamentals, the demand of industrial products in the energy sector may decline with the fall of global economic growth, which in turn affects prices. Market trends for energy, chemicals, ferrous and non-ferrous metals, which are cyclical commodities, will diverge further against the backdrop of weakening overall demand.

In contrast, agricultural products are perhaps more resilient and still have room for price rise. The turning point of commodities market depends on the actual effect of the Federal Reserve to curb inflation and the actual performance of the economic growth rate.