Positive Macroeconomic News Points to Easing Monetary Conditions
The US inflation rate slowed to 3% in June 2023, the lowest since March 2021 and below expectations of 3.1%. The slowdown was partly due to a high base effect from last year, with food, energy and shelter prices cooling off in recent months. Producer prices also signaled a slowdown in economic activity, rising 0.1% month-over-month in June 2023, below market forecasts of 0.2%. The market is now pricing in a 25 bps rate hike in July which is expected to be the last in the current rate hike cycle.
United States Inflation Rate
Consequently, the DXY has broken a key level of resistance at $101 as traders contemplate the end of the Fed’s rate hikes. USD weakness is good news for commodities bulls as it translates to higher export volumes and greater revenue for commodity producers, stimulating economic growth and providing opportunities for expansion.
Two of my favourite players in the commodity space are $Vale SA(VALE)$ and $APA Corporation(APA)$. Here is the investment thesis for these two stocks:
Vale
Investing in Vale, one of the world's largest mining companies, offers compelling reasons for potential investors. With its diversified portfolio of minerals and metals, including iron ore, nickel, and copper, Vale benefits from strong global demand for these commodities. The company has a solid track record of delivering consistent profitability and shareholder returns. Additionally, Vale's strategic investments in technology and sustainability initiatives position it well for long-term growth. As global infrastructure projects continue to drive demand for commodities, investing in Vale provides exposure to a stable and resilient industry, making it an attractive opportunity for investors seeking to diversify their portfolios.
Vale Daily Chart
Vale is currently trading in a triangle consolidation pattern, finding support at the lower trendline. Due to my bullish view on commodities, I soon expect Vale to break out above its consolidation pattern as the global economy starts to recover and demand for commodities returns. With a price target of $20, Vale offers over 40% returns to investors looking to capitalise on a commodity boom cycle as monetary policy shows signs of easing.
Apache
Investing in Apache Corporation offers a compelling opportunity for potential investors. As a prominent independent energy company, Apache has established a strong foothold in the exploration and production of oil and natural gas. The company's diverse portfolio encompasses valuable assets, including both onshore and offshore operations across various regions worldwide, such as the United States, Egypt, and the North Sea. Apache's commitment to prudent capital allocation and operational efficiency has consistently generated robust cash flows, translating into favorable returns for shareholders. Furthermore, the company's strategic focus on leveraging technological advancements and optimizing costs positions it well to adapt to the changing dynamics of the energy sector. With the long-term global demand for energy expected to persist, investing in Apache provides an opportunity to participate in a resilient industry with the potential for attractive financial gains.
APA Daily Chart
After a superior 2021, APA spent most of 2022 consolidating between $32 and $50 as the supply of oil remains tight. With the Biden Administration continuing to purchase oil between $68 and $72 per barrel, energy companies stand to benefit from this price floor. Demand recovery could lead to a spike in oil prices, which could catalyze a move for APA back to $50 levels, representing an upside of close to 40%.
In conclusion, I believe that monetary easing could be around the corner as inflation continues to cool faster than expected. The loosening of financial conditions is a boon for commodities and is likely to create a spike in demand which would raise prices and the profitability of commodity producers. Therefore, I recommend taking a long position in the materials and energy sectors by owning VALE and APA stock as an economic recovery play.
Cooler Inflation, Weaker Dollar: A Boon For Commodities
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