AAmong traders, the price of copper is often seen as predictive of other growth-sensitive markets. Indeed, its diagnostic and predictive properties are such that it is often referred to as “Doctor Copper”. The metal is used in many industrial and construction applications, so fluctuations in its price as demand fluctuates can be early indicators of economic strength or weakness. However, we must never forget that there is also a supply side to this price equation, and we have all been reminded of this in stark terms over the past couple of years.
This makes the interpretation of brass movements a bit more nuanced these days than much of the time in the recent past. But it is still a valid exercise. In fact, you could say that given the importance of inflation right now and copper’s fundamental place in input costs for a wide range of businesses, it’s more worth it than ever. At the very least, analyzing the copper market is worth doing, because when you do, it sends a much-needed ray of hope as the stock market crashes.
This silver lining comes from the pullback from the March highs.
Since the pandemic lows of early 2020, copper has rebounded strongly to reach well above 2019 highs. This is partly due to a recovery in demand, but the overshoot indicates that it is largely due supply restrictions. Demand has rebounded strongly, but the economy isn’t 50% bigger than it was in 2019, and neither is copper demand. For the price to move from its pre-pandemic high of around $2.80 to its current level of $4.20, there must be some sort of supply issue. Of course, this isn’t new to anyone, and it’s not limited to copper either. We have heard to satiety on supply chain issues for months now in relation to almost everything we do and buy. The decline in copper suggests that these issues may be easing.
So far, other commodities have not retreated to the same extent. Most grains are at or near their peaks; oil is also below its March peak but has stabilized at high levels; and others like cotton and natural gas seem to be on the rise again. However, if we accept the diagnostic and predictive role of Doctor Copper, the decline of the metal should mark the beginning of a retracement of commodity prices in general, and therefore a reduction in inflationary pressures. Obviously, this matters because the current market slump was caused by concerns about inflation and the damage that the reaction of the Fed and other central banks to that inflation will do to economic growth.
Fed Chairman Jay Powell weighed in on the matter yesterday, saying he couldn’t guarantee a “soft landing” for the economy, and that maybe they should have started raising benchmarks. earlier rate. Basically, it’s an admission of guilt, but if copper’s pullback holds and is indeed predictive, Powell’s rash might be spared somewhat and his blunder might not be that bad by the end of this year. He will be ridiculed for changing course at the worst possible time of course, and getting it wrong both ways, but if price pressures start to ease he can at least move on to more gradual rate increases. and do a little less damage.
When we contact Doctor Copper, there is a hint of good news. It’s still early days and the downside could just be normal volatility based on technical factors. However, copper has fallen 15% in the past month and is showing a strong downtrend. This suggests that the move is more likely to be based on supply and demand fundamentals and if that turns out to be the case, other commodities are likely to follow. That’s a lot of ifs, ands and buts, that being said, the results of the checkup with the doctor are encouraging.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.