Inflation fears are back. Gold and oil are definitely becoming more expensive

The issue of inflation is starting to appear again on the financial markets due to the rapid increase in prices of raw materials, especially Petroleum. This is also reflected in 10-year market inflation expectations, which rose to 2,36% in the US yesterday, the highest level since November 2023.

Impact on bonds. The forward curve is trying to invert again

Increased expectations for higher inflation in the longer term could have led to a rapid increase in US bond yields at the long end. The interest rate on 10-year bonds increased yesterday to 4,40%, i.e. to the highest level since November 2023. yields of 2-year bonds increased slightly, without breaking the recent peaks. As a result, the difference between interest rates at the longer and shorter ends decreased to 0,338%. Therefore, the long end may be influenced by the commodity market and the prospects for still solid economic growth, and the short end may be influenced by the Fed's willingness to cut interest rates.

Loretta Mester calmed down yesterday's market nervousness

Federal Reserve Bank of Cleveland President Loretta Mester said Tuesday that she still expects interest rate cuts this year "if the economy continues to grow as expected." However, it ruled out the possibility of any interest rate cuts during the upcoming May meeting.

“I continue to believe that the most likely scenario is for inflation to continue on a downward trajectory to 2% over time. However, I need to see more data to increase my confidence.” – she said in a speech to the Cleveland Association for Business Economics. “I don't expect to have enough information by the next FOMC meeting to make that decision.”.

Moreover, Mester emphasized the importance of additional inflation readings in providing insight into whether some of the data points that exceeded expectations this year were temporary anomalies or indicated a slowing in inflation progress.

Gold, oil and silver are gaining popularity

Spot gold has almost reached USD 2300, up about 10% since the beginning of the year. Crude oil (WTI), in turn, has increased in price by 17% since the beginning of the year, and a silver increased by about 10%. As a result, the silver price reached its highest level since March 2022, oil is at its most expensive since November 2023, and gold is breaking historic records.

On the one hand, the increase in commodity prices can be explained by the revival in industry, as we can see in the PMI indicators, especially from China, and on the other hand, it may be a natural element of the cycle of transition from the stock market to the commodity market and expectations of a decline in real interest rates (the difference between nominal value of the central bank and inflation).

Nevertheless, it currently seems that there are no factors on the horizon that could reverse the trend in raw materials, and their impact on inflation may be significant in the second half of the year, and the cycle may have only just begun.