Persistent core inflation lends credence to the market’s anticipation of rate cuts holding off until June. Once interest rate cuts kick in, however, commodities look particularly well-positioned given historical performance. Metals in particular historically benefit in rate cut environments.
The personal consumption expenditures (PCE) index came in at expectations for February. While not creating any surprises for investors, persistent core PCE inflation strengthens the Fed’s holding position on rates for now.
PCE rose 2.8% year over year and 0.3% month over month, right at Dow Jones expectations. Meanwhile, core PCE — which excludes energy and food — rose 2.5% YoY and 0.3% MoM on expectations of 2.5% and 0.4%, respectively, reported CNBC.
Markets now are forecasting that rate cuts will begin in June. The CME Group FedWatch Tool currently shows a 56.9% probability of a quarter point cut in June, compared to 41.8% holding rates steady.
What Rate Cuts Mean for Commodities
Though the Fed remains cautious, it held steady to the forecast of three rate cuts this year at the most recent FOMC meeting. When rate cuts begin, commodities — and specifically metals — stand to benefit, if history is any indication.
Goldman Sachs released a report last week underscoring the potential performance of commodities this year, reported U.S. Global Investors. The bank forecasts a 15% total return for commodities in 2024. Raw materials such as metals look to benefit strongly.
Image source: U.S. Global Investors
Commodities historically rise as interest rates fall when there isn’t recession, according to Goldman Sachs analysts. Rising performance is attributed to growing raw materials demand on falling costs. Additionally, the appeal of commodity diversification when yields fall draws investors.
The energy transition creates an added, longer-term layer of positive price momentum for electrification metals. Forecasts call for an exponential increase in demand for the metals key to renewable energies, EVs, and more. Copper, aluminum, lithium, nickel, and more could see potentially significant price increases as the supply and demand imbalance grows.
The KraneShares Electrification Metals Strategy ETF (KMET) offers exposure to electrification metals, like copper. The fund rose 7.83% on a price return basis in the last month, according to Y-chart data. The fund is down 2.21% YTD, as of 03/12/24. It currently trades above its 50-day simple moving average (SMA) but below its 200-day SMA, as of 03/28/24.
Investors would do well to consider the positive forecasted impact of rate cuts this year on commodities. That, coupled with the long-term outlook for electrification metal prices and forecast supply and demand imbalances , creates a compelling picture for investment. Investors have a rare opportunity to gain access to electrification metals at reduced prices ahead of the increasing demand curve.
KMET offers targeted exposure to the metals necessary for electrification, such as copper, lithium, and more. The strategy harnesses the growing metal demand from the clean energy transition via the futures market.
The fund seeks to track the Bloomberg Electrification Metals Index. KMET carries futures contracts on copper, nickel, zinc, aluminum, cobalt, and lithium. These metals are all core components for batteries, electric vehicles, and the renewable energy infrastructure needed to meet 2050 net-zero goals.
KMET’s largest allocations currently include copper futures at 30.58%, followed by nickel futures at 22.89%. The fund has an expense ratio of 0.80%.
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