Good Sign for Low Inflation, Bad Omen for Economy

Leonardo Rasaki
  • Copper prices are likely to continue their decline and fall another 11%, according to Fairlead Strategies’ Katie Stockton.
  • That would be a good sign for lower inflation, but a bad omen for the economy as copper is seen as a barometer of economic activity.
  • “During severe economic recessions, copper and market declines have been relatively big,” Ned Davis Research said.

The ongoing decline in copper prices is likely to continue further according to Fairlead Strategies’ Katie Stockton, and while that could be viewed as a good sign for cooling inflation, it’s a bad omen for the broader economy.

Copper prices are often viewed as a leading indicator of the broader economy and a dependable barometer of economic health as the industrial metal is used as an input in a vast majority of goods sold. As demand rises for copper due to economic strength, so does the price, and vice versa.

Copper prices have been in a steady decline since their early March high of about $5 per pound, with the metal falling more than 30% to $3.41 per pound. Stockton expects the decline to continue, arguing that copper could fall another 11% from Thursday’s close to $3.14 per pound.

“Copper prices have lost short-term momentum after rolling over below cloud-based resistance last week. Now back below initial support from the 50-day moving average, copper’s loss of momentum within its prevailing downtrend increases risk to Fibonacci support at $3.14 per pound,” Stockton said.

A decline to $3.14 would represent a peak-to-trough drop of 38% in just five months, and moves of that magnitude are typically associated with an economic pullback.

But according to Ned Davis Research, the pullback in copper prices could simply represent an economic growth scare rather than a full-blown recession.

“Copper’s tendency to reflect economic conditions is evident in the chart [below]. The chart shows that after the starting dates of the past 10 OECD-defined global economic slowdowns, copper has been down by means of -4% six
months later and -15% a year later, lower in all but one case,” NDR explained. “The declines have tended to be
especially pronounced during the severe slowdowns.”

Copper prices

Ned Davis Research

But the decline in copper prices so far this year is not deep enough to suggest a sever economic slowdown is imminent, according to NDR. “2022 [copper price] declines have thus far been more consistent with moderate [economic] slowdown,” NDR said.

Any recovery in copper prices would be a good signal for the broader economy and help build the case that the Federal Reserve could stick a soft economic landing as it seeks to tame inflation via interest rate hikes. But if copper prices stage a further decline, as Stockton expects, then investors should expect choppy economic growth ahead. 

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