Good sign for low inflation, bad omen for the economy
- Copper prices are expected to continue their decline and fall another 11%, according to Katie Stockton of Fairlead Strategies.
- This would be a good sign of lower inflation, but bad news for the economy as copper is seen as a barometer of economic activity.
- “During severe economic downturns, copper and market declines have been relatively large,” said Ned Davis Research.
The continued decline in copper prices is expected to continue according to Fairlead’ Strategies Katie Stockton, and while that could be seen as a good sign of slowing inflation, it does not bode well for the economy in general.
Copper prices are often considered a leading indicator of the broader economy and a reliable barometer of economic health, as the industrial metal is used as an input in the vast majority of goods sold. As the demand for copper increases due to economic strength, the price also increases, and vice versa.
Copper prices have been steadily falling since peaking around $5 a pound in early March, with the metal falling more than 30% to $3.41 a pound. Stockton expects the decline to continue, arguing that copper could fall another 11% from Thursday’s close at $3.14 per pound.
“Copper prices have lost near-term momentum after breaking below cloud-based resistance last week. Now back below initial 50-day moving average support, copper’s loss of momentum in its current downtrend increases the risk for Fibonacci support at $3.14 a pound,” Stockton said.
A drop to $3.14 would represent a 38% drop from peak to trough in just five months, and moves of this magnitude are usually associated with an economic pullback.
But according to Search Ned Davisthe decline in copper prices may simply represent fear of economic growth rather than an actual recession.
“Copper’s tendency to reflect economic conditions is evident in the chart [below]. The chart shows that after the start dates of the last 10 global economic downturns defined by the OECD, copper is down -4% six
months later and -15% a year later, lower in all but one case,” NDR explained. “The declines tended to be
particularly pronounced during severe slowdowns.”
But the fall in copper prices so far this year is not deep enough to suggest a severe economic downturn is imminent, according to NDR. “2022 [copper price] declines so far have been more consistent with [economic] slowdown,” NDR said.
Any recovery in copper prices would be a good signal for the wider economy and help demonstrate that the Federal Reserve could stick to an economic soft landing as it seeks to tame inflation via hikes. interest rate. But if copper prices fall further, as Stockton predicts, investors should expect choppy economic growth.