The noise
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The Federal Reserve has put its 15-month rate-hiking mission on hold for now, but signalled they would likely resume tightening in the near future to cool inflation further. The move held the benchmark federal funds rate in a target range of 5% to 5.25%, coming a day after US inflation dropped to 4% in May from 4.9%.
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British wage growth shot up by 7.2% in the three months to April, surpassing economists’ predictions of 6.9%. In doing so it heightened expectations that the Bank of England will need to raise interest rates a couple more times to curb inflation, with chancellor Jeremy Hunt insisting the UK has “no alternative” but to raise rates to tackle rising prices. The unemployment rate fell to 3.8% in the three months to April, down 0.1% in the three months to March.
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Palm oil has emerged as an interesting proxy trade (a way to express a view that cannot be directly traded) for the El Niño phenomenon. El Niño, a term used to describe the warming of sea surface temperature that occurs every few years in the central-east pacific, will likely lead to a hotter and drier climate in major palm oil-producing countries like Indonesia and Malaysia, reducing crop yield.
The numbers
The nuance
El Niño, a phenomenon that we described in ‘The Noise’ as the warming of sea surface temperature that occurs every few years in the central-east pacific is going to have significant impacts on soft commodities in the near future. As mentioned for palm oil, El Niño has led to speculative purchasing of crops that will be adversely impacted by it effects, with short positions taken in crops from regions that will benefit.
The price of rice from Vietnam for example has reached a two-year peak this week, as the threat of hot and dry weather caused by El Niño weighs on the production outlook. In India, many of the worst droughts it has faced have been during periods of El Niño. As such, the government has blocked sugar exports until at least early 2024, with global sugar prices trading at near multi-year highs in the meantime. The effects of El Niño are likely to be exacerbated by the effects of climate change, and will not only impact soft commodity traders but the global economy. This period of El Niño will put an emphasis on the importance of incorporating sustainable-investing principles into investment decision making, as we look to limit further global warming.
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