Three factors weighing on commodities

Oil is back below prewar levels

On Friday, Brent crude closed below $73/barrel, in line with the prewar level, while West Texas Intermediate (WTI), the US benchmark, is a shade above the prewar level. The weekend saw another escalation between the US and Iran, but as of this morning, it looks as if both sides will 'stand down for now'. Brent and WTI are up around 1% this morning.

Gasoline (petrol) prices in the US have not fallen as much as oil prices, as refining margins have remained high. This is partly due to supply disruptions in the Middle East and partly due to Ukraine successfully damaging Russian refining capacity. The net result is that, while inflationary pressures are dissipating, they are not dissipating by as much as one might deduce from simply tracking oil prices.

Other commodities are down too

While oil is down 26% over the past month, other commodities have slipped too. Platinum is down 17%, gold is down 9%, iron ore is down 6% and copper is down 2%. As far as we can tell there are three primary, linked factors driving the pullback in commodities:

a)            China is slowing. We've written a fair bit over the past six months about dimming prospects for Chinese GDP growth. The latest data, as covered last week, further confirms a slowdown in economic activity. Despite still-low inflation, there seems to be little appetite among Chinese authorities to spur growth. The latest confirmation is early signs that the Chinese authorities are pursuing austerity. The budget deficit has declined for the first time since 2023. According to Bloomberg, government spending was down 4% year-on-year, the third consecutive decline.                        

b)            Dollar strength. Despite the cessation of hostilities in the Gulf and strong risk-on sentiment, the US dollar has strengthened. While this may take the edge off US inflation, it is also very unhelpful for commodity prices.

c)            A new sheriff in town. Federal Reserve President Kevin Warsh has previously argued against the Fed having a large balance sheet and has been regarded as an inflation hawk. Since his appointment, debasement plays (such as gold, bitcoin, and non-US currencies) have performed poorly, according to Bloomberg analysis. This may well have played a part in the recent weak performance of hard assets.                     

Incidentally, the total market cap of crypto coins has halved since October last year. 

US first-quarter growth has been revised upward

It continues to be a good patch for US economic activity, with first-quarter GDP growth revised up from 1.6% to 2.1%.

And the second-quarter numbers are currently running ahead of the first quarter. A strong economy is among the reasons the market is expecting the Fed to hike, and the dollar has been strong.

US core PCE rises again

Inflationary pressures continue to build in the US, with core personal consumption expenditure (PCE) inflation up 3.4% year-on-year, in line with consensus. The previous month was 3.3%.

Three-month annualised core PCE inflation has declined but remains well above 2%.

It will be a while before the core PCE reaches the Fed's 2% target, even if month-on-month inflation drops to the 20-year median.

Economists surveyed by Bloomberg estimate core PCE inflation will only average close to 2% in 2028. But lower energy prices should curb month-on-month PCE inflation. Year-on-year PCE inflation should also start to moderate.

Inflation is currently greater than the Federal funds rate. This implies that monetary policy might be overly accommodative in the US, especially given the strong growth backdrop.

Both personal income and spending are rising in the US

Personal income and personal spending both rose 0.7% month-on-month last month.

It's unusual for spending growth to be in line with income growth. It's an early indication that consumers may be stretched.

Income growth has been above spending growth for most of the last five years. What is the straw that will break the camel's back? 

Operating margins are high in both the US and Japan

Operating margins are at their peaks across multiple industries in the US. Consumer staples, discretionary, health care and real estate are the sectors where margins are compressed.

Twelve-month operating margins are particularly telling in Japan. There has been a sizeable margin expansion story in Japan as wage growth accelerates and the aggregate Nikkei operating margin is near a record high. 

There's been a pullback in tech stocks

The past month has seen a sizeable pullback in several high-profile tech stocks. For example, Microsoft is down 17% this month, Amazon is down 14%, Google is down 11% and Nvidia is down 9%.

The S&P 500 software and services index is down 16% month-to-date and is now down 29% from its October 2025 high. In contrast, the equal-weighted S&P 500 is up month-to-date.

Year to date, the S&P 500 is up around 7%, while the S&P 500 equal-weight index is up around 11%. There is clearly a wide dispersion in the market. 

SA private sector credit extension is stable

Despite the recent increase in rates, South African private sector credit extension remains robust. That said, interest rate expectations may suggest some strain ahead. 

PPI in South Africa surges

In another blow for interest rate expectations, the producer price index (PPI) rose 7.8% year-on-year last month. PPI is typically a leading indicator for consumer prices. That said, a weak consumer may imply lower margins. 

SA inflation increases, but by less than expected

The consumer price index rose by 4.5% over the 12 months to May, up from 4% in April but below the consensus forecast of 4.7%. South African inflation is just 0.3 percentage points above US inflation at this point; over the past four years, it has been relatively close to the global rate. This has long-term consequences for the rand – the expected long-term depreciation is now much lower than before the pandemic.

While inflation has been closer to the global average, it remains at a level uncomfortable for the South African Reserve Bank. Our model forecast is for inflation to drop to 4.2% next month and then trend up to 5% by November. That's based on spot prices, so if there is a sharp movement in either direction, we will need to re-estimate the trajectory. Should inflation get to 5%, there is a risk of another rate hike.