So what does a cut in US central bank rates usually do to commodity prices? One of the possible answers is offered by , in my opinion, a few additional comments will not hurt it.
1. Commodities, rates and bond yields: The following graph shows the development of commodity prices during the time of central bank rate cuts. More specifically, it is the sensitivity of commodity prices to a one percentage point decline in two-year government bond yields (reflecting a decline in central bank rates). And all this only if there is no recession in the economy:
commodity rate cut by the US central bank? One of the possible answers is offered by , in my opinion, a few additional comments will not hurt it. 1. Commodities, rates and bond yields: The following chart shows price developments” src=”https://www.patria.cz/Fotobank/318a6318-a8f0-438b-b758-10a7197cd959?width=500&height=466&action=Resize&position=Center” />
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2. Bond rates and yields (and the recession): First, a few notes on the eventual development of two-year government bonds: Yields on these bonds are now at 4.6%, the last time they were at such levels (prior to 2022) was in 2007. This also shows that there has been a big move in rates and bond yields shift So far, it is still not known how much is structural and how much is cyclical. At the same time, both Fed rates and developments in the economy are reflected in the returns. And sometimes we can come across considerations that the yields of two-year bonds are actually an indicator of what the central bank should do with its rates.
Now the spread between the Fed and two-year bond rates is extreme. If two-year bonds were really a leading indicator, the Fed should be cutting rates by now. A drop in central bank rates by perhaps 25 basis points, however, in such a situation does not necessarily mean a drop in two-year bond yields by 25 basis points. And even in an imaginary economic equilibrium, short-term bond yields should exceed Fed rates. So, from that perspective, it wouldn’t be surprising if for every 25bb of a drop in central bank rates, there was less than a 25bb of a drop in bond yields. That is, for the 100 basis point drop shown in the chart, rates might have to drop significantly more.
An additional piece of thought would then point out that the decline in short-term bond yields should gradually lead to a de-inversion of the yield curve. That is, to the return of these yields below the yields of long-term bonds. And if we look at the last few decades, this very deinversion was an indicator of an impending recession (not the previous inversion, as is often claimed). But I certainly don’t enjoy predicting various unpleasant scenarios, and history doesn’t have to repeat itself, its possible rhymes can be very weak.
3. Commodity prices: So if bond yields were to drop by one percentage point without a recession, according to the chart, copper prices rise the most in such an environment. This fits its profile as a cycle-sensitive industrial metal (with the implicit assumption that rate cuts should eventually stimulate economic activity). Gold is also said to benefit from lower interest rates and vice versa (although the development of the last few years does not really support this “opposite”). And the small sensitivity of agricultural commodities, which are largely driven by supply factors and not the demand cycle of the economy, is probably intuitive.
