- Commodities
Bloomberg Intelligence
December 5, 2022
This analysis is by Bloomberg Intelligence Senior Macro Strategist Mike McGlone. It appeared first on the Bloomberg Terminal.
The fact that “don’t fight the Fed” became the primary mantra about a year ago and still is at the start of December 2022 may keep pressure on commodities. Spiking food and energy prices on the back of Russia’s invasion of Ukraine stoked inflation and central-bank tightening. The fallout from the rate increases is likely to accelerate in 2023 and propel a typical dump following pump cycle in commodities. Lose-lose is our 2023 commodity bias, because if the only major asset class that gained in 2022 doesn’t decline, central banks may be more likely to stay the rate-hike course.
Commodity investments proved their diversification attributes in 1H, but ample producer profits represent the typical supply-and-demand elasticity headwinds for prices. Gold is ripe to shine in 2023, notably if the Fed tilts toward easing.
Commodities insights delivered monthly to your inbox
Sign up for the newsletter
Plunging global liquidity, an inverted yield curve and commodity-performance history point to increasing risks of severe economic contraction and demand destruction in 2023. It may be a question of what would stop this trajectory, and it doesn’t appear to be stimulus from the Fed, until or unless prices drop.
Hot commodities in 2022 risk being too cold in 2023
There may be little stop the commodity pendulum from swinging downward in 2023. The shift toward recession is indicated by the average yield on sovereign debt maturing in 10 years or more falling below that of securities due in one-to-three years, based on Bloomberg Global Aggregate bond subindexes. Commodities normally get too cold in recessions, especially after a too-hot period that may have spurred central banks to tighten more aggressively.
The history of the Bloomberg Commodity Spot Index reaching a 50% premium to its 100-week moving average as it did in 1H shows that about 20% is a standard discount in the aftermath, which helps reset supply and demand. Bullish potential may come from China reopening, but the country faces a property crisis, and leadership is bending more toward the North Korea model vs. Singapore.

Elevated commodities vs. Recession and reversion
The Bloomberg Commodity Spot Index (BCOM) has never rallied at a similar velocity as in 2022 without an ensuing US recession, and that may play out in 2023. The index stretched about 70% above its 60-month moving average in 1H, and our graphic shows that the only period since 1960 that the index didn’t put in a substantial peak upon reaching such heights was 1973-74. Repercussions of further gains that would fuel inflation and more central bank tightening vs. the propensity to revert lower suggest commodity prices may be inclined toward losses in 2023.
It could be a question of the extent of diminishing global economic growth and commodity demand in the coming year. Our inclination is that absent a substantial amount of fiscal and monetary stimulus, commodities are likely to face headwinds along with the global economy.

What stops 2H downward momentum in 2023?
Gains for 2022 in the Bloomberg Commodity Index Total Return peaked near 40% in June, with the gauge up about 20% on Nov. 30, and 2H downward momentum may carry into 2023. If the lone major asset class to rally in 1H — commodities — doesn’t continue to revert lower along with the stock market, central-bank tightening may intensify as the world tilts toward recession. This is the state of play at the end of November, and we see greater potential for the Bloomberg Commodity Index, at the top of the 2022 scorecard, to trade places with the Bloomberg US Treasury 20+ Index near the bottom.
Approaching the end of 2022, commodities appear as the sore-thumb asset class, which if it doesn’t drop and help alleviate central-bank rate hikes, the world is more likely to enter an enduring recession.

Hot crude may trade places with cold gold in 2023
Spiking energy prices in 1H may have prompted the most central banks in history to tighten more than necessary, which could swing the other way in 2023, supporting gold. Our view of the 2022 sector performance scoreboard at the end of November is that the remaining gains in energy and grains reflect a war premium that risks fading. Supply and demand elasticity will have ample time to respond a year from now, and it was the sharp rise in prices that added fuel to the global tack toward recession.
Our key question at the end of November is, what stops this process? Not the Fed. Not the fact that the cost of production in the US, the world’s largest producer of crude and corn, is almost half the price. Additional commodity headwinds come from China’s increasingly autocratic leadership.

Recommended for you
Request a demo
Contact us