We are witnessing a second wave of increases in commodities prices, perhaps in anticipation of Fed actions later in the year. Not only rate cuts are expected but also quantitative tightening should stop or be reduced this year. The chart below shows the sensitivities to a 100 bps decline in the 2 yr Treasury yield as a consequence of monetary policy. Deltas of 6X could be seen in metals, while Oil could see 3X movements. And there is potentially some room to go. If the goal is 2.5% for Fed funds, consistent with 2% inflation, the 2 year Treasury will not be far from that, and that means 275 bps of potential declines in the short end of the curve that could push commodities up meaningfully over the next few months.
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