The debate continues. Are commodity prices at a point of further price sell-off due to fears of global recession, or are prices about to rebound and extend higher due to the reality of still tight global grain and oilseed supplies? Let's dig in to a few key factors to watch:

Global economic leaders: European Union, China and India

This week commodity markets turned lower when it was announced that the European Union had higher than expected August inflation numbers. In Europe, consumer prices rose at a record pace of 9.1% in August year-over-year, up from 8.9% in July, according to Eurostat, the European Union's statistics agency. Trade thinks that this still high inflation number will increase the odds of a bigger, 75 basis-point interest-rate rise by the European Central Bank at its Sept. 8 meeting. Higher inflation rates and the continuation of raising interest rates draw speculation that demand for commodities might be tamed.

The global concerns continue when looking at the Chinese economy. The zero tolerance for Covid continues to keep workers home and factories closed throughout various, rotating regions of China. This is reducing overall growth in China’s economy. Looking forward, on Oct. 16, China’s leaders are proposed to meet in Beijing to hold their 20^th National Congress. The national congress is held every five years and determines the next group of leaders for the ruling party. This gathering has additional merit this year as China will also likely signal its upcoming economic plans and policies, and the world will watch to see if a date might be released on when China might ease its zero-Covid policy.

One country quietly showing economic growth is India. Data was released this week that India's economy grew by 13.5% in the second quarter, supported by a boost in agriculture and manufacturing. The increase follows a 4.1% growth figure in the January-March quarter.

India is one of the fastest-growing major economies in the world yet is not immune to the global economic pressures and inflationary figures affecting most global economies. In July, the International Monetary Fund revised its growth forecast for India from 8.2% to 7.4% for the current fiscal year, which began in April. Also dealing with high inflation, India's central bank projected inflation at a large 6.7% this fiscal year and raised its key interest rate by 50 basis points to 5.4%, in its third such hike since May.

Discrepancies in the U.S. economy

Here in the United States, the banter continues that on paper, officially the United States is in a recession due to two consecutive quarters of negative economic growth. The U.S. economy shrank by 1.6% in the period from January to March. Then in the second quarter, the U.S. economy constricted again by 0.6%.

The debate comes in that there are still other ways economists gauge levels of recession; they look at unemployment numbers, retail sales and consumer income.

And the following information is why many are wondering if the United States is actually in a recession or not as the information does not necessarily scream recession.

When looking at recent U.S unemployment numbers, U.S. job openings rose unexpectedly in July after a sizable upward revision to the previous month. The number of available positions edged up to 11.2 million in the month, from a revised 11 million in June. In essence, there were about two jobs for every unemployed person in July, up from 1.9 in June.

It is of interest to note that job vacancies have exceeded 11 million since late last year and the unemployment rate remains historically low, exemplifying the strength of the U.S. jobs market.  

Overall, the numbers show persistent tightness in the labor market as employers compete for a limited supply of workers. Despite the Fed’s sharp interest rate increases, the unemployment rate is at 3.5%. It matches the lowest level since 1969. The next glimpse at these numbers comes out on Friday when the Bureau of Labor Statistics releases its August report.

The discrepancy between high demand for workers and lack of supply of workers continues to increase worker pay wages. The people who are working, are making decent money. This might be adding a level of complexity to the Federal Reserve's efforts to tamp down inflation. As long as people are employed, they seem to be dealing with inflation for the most part. In other words, inflation is still a problem, and maybe not enough has been done yet to fix it.

Taking steps to tame inflation

Inflation in the US is at a four decades-high and the US economy has shrunk for two consecutive quarters. Some U.S. economists suggest that to tame inflation in the United States, interest rates need to continue work higher, and get to the point where the interest rate itself is above the rate of inflation. So that means either inflation levels need to come back down quick, or interest rates will need to work higher yet.

Current U.S inflation is at 8.5%. The Fed currently targets its policy rate in the 2.25%-2.5% range. That is a big spread between the two numbers. There has been loose industry talk that perhaps the Fed might need to raise rates to something closer to 4.25%.

This notion was confirmed on Wednesday this week when Cleveland Federal Reserve Bank President Loretta said, “The U.S. Federal Reserve will need to raise interest rates somewhat above 4% by early next year and then hold them there in order to bring too high inflation back down to the central bank's goal.”

But even that 4% number is still below where the rate of inflation is. And the real question is, what will inflation do? Can inflation come down and meet the interest rate increases at some happy point in the middle? Have we even fixed the actual problem yet for some of these high inflation figures? We've only seen a cooling of inflation recently because grain (and crude oil) commodity prices collapsed so much earlier this summer.

Since then, many commodities prices have been trading in a sideways pattern. Grain and oilseed commodities are waiting for signs of demand (if only we had weekly export sales reports that worked), for Mother Nature for end-of-season growing weather, and for the calendar to get closer to harvest to know what is actually out in those fields.

Bottom line, my hunch is we haven't fixed the problem that made commodity prices go up in the first place, which is still tight global grain and oilseed commodity supplies. More on that next week.

Reach Naomi Blohm at 800-334-9779, on Twitter: @naomiblohm, and at [email protected].

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