Saxo Bank recently adjusted their U.S. economic outlook for 2024 to what they refer to as ‘stagflation light’, characterized by “sluggish growth paired with persistent inflation.” Hansen said that the massive rise in real interest rates has made “the funding costs for the US almost insurmountably high,” and contributed to the downgrade of U.S. credit by Fitch.
“This combination of low growth and moderately high inflation is indicative of stagflation, and if materialized it will confirm a view that the Federal Reserve and central banks around the world in general are fighting a losing battle against stubbornly high inflation and that further action will damage economic growth while doing nothing to tame the sticky nature of prices pressure,” he said.
He added that “a weaker dollar can make dollar-denominated commodities more affordable for non-dollar-based buyers, potentially amplifying demand and prices,” and they are also attractive because they can deliver positive real returns even as inflation saps the returns from traditional investments. “An ample supplied market would in normal circumstances always trade in contango as a higher forward price reflect the cost of storage, transportation, and not least funding costs,” he said. “The chart below shows the spread between the first and the 12th month futures contracts across the major energy and metal futures. The yellow line stands for the one-year funding cost inverted, currently around 5.
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