J.P. Morgan's Global Market Strategy: Are Current Commodities Reminiscent of 2022?

Author: Insights from the Market

J.P. Morgan now expects the Federal Reserve to raise interest rates in December (previously anticipated in the third quarter of 2027), with evident rate hike risks in September if inflation heats up again.

Since 1990, commodities have generated positive returns in every Federal Reserve rate hike cycle, except for the most recent one (from March 2022 to July 2023).

During that cycle, the sector significantly deviated from the previous norm, declining by about 14%, due to the fading risk premium from Russian supply disruptions and worsening adverse factors facing manufacturing, which exacerbated the bearish response in commodity prices.

From an interest rate perspective, the mid-cycle rate hike adjustment from June 1999 to May 2000 is similar to the current situation.

Commodities performed strongly during this cycle, although the performance began from a low point following the Asian financial crisis and was primarily driven by a rebalancing in the oil market led by OPEC.

While the Fed's backdrop may seem reminiscent of 1999, the commodity market environment is more akin to 2022, facing risks such as:

The potential fading of supply disruption premiums may coincide again with adverse factors from a tighter financial environment, leading to a more subdued cooling of the commodity sector in any upcoming rate hike cycle.

An Interesting FOMC Meeting.

Last Wednesday, the FOMC kept interest rates unchanged, aligning with our economists' expectations, although the number of dissenting hawkish members was one more than anticipated, with Kashkari's dissent being a moderate surprise.

While the prepared remarks of Chair Warsh were hawkish, he failed to endorse a clear target, undermining his credibility in combating inflation (Figure 1).

This, combined with comments on the effectiveness of the Fed's tools against inflation, accelerated the distortion steepening of the U.S. Treasury curve, while the mid-term inflation breakeven rate surged sharply, an unusual situation following the FOMC meeting.

Figure 1: An Interesting FOMC Meeting

The first Fed rate hike is currently expected in 2026. Overall, as the committee leans more hawkish, the FOMC may now face market pressure reflecting doubts about whether Warsh's tough inflation rhetoric will translate into action.

This increases the urgency for other committee members to take action to fulfill their mandate and reinforces our economists' view that the Fed is moving towards rate hikes, with the risk of acting preemptively also increasing.

As a result, they have brought forward their expectations for the next rate hike from the second half of 2027 to December this year, emphasizing that there is evidently a risk in September if inflation heats up again. This adjustment reflects not so much market "pressure" on the Fed but rather another challenge prompting the Fed to act to maintain its credibility.

Commodities Have Delivered Strong Returns in Previous Rate Hike Cycles... Until 2022

Since 1990, the Fed has initiated five rate hike cycles (February 1994, June 1999, June 2004, December 2015, and March 2022), each lasting about one to three years (Figure 2).

Commodities have generated positive returns during these Fed rate hike cycles, except for the most recent one (from March 2022 to July 2023), where the sector significantly deviated from the previous norm, declining by about 14% during the duration of the rate hike cycle (Figures 3 and 4).

Nevertheless, even during the last rate hike cycle, the BCOM ER index followed the previous pattern of rising relatively early in the rate hike cycle, before diverging significantly from historical performance.

Figure 2: Bloomberg Commodity (BCOM) ER Index vs. U.S. Federal Funds Target Rate (Upper Bound)

Figure 3: Performance of BCOM ER Index During the Last Five Fed Rate Hike Cycles

Figure 4: Performance of BCOM ER Index During the Last Five Fed Rate Hike Cycles

How to Explain the Divergence in Performance in 2022/23?

In previous analyses, we inferred that the sustained strong returns of commodities during Fed rate hike cycles might be driven by supportive macroeconomic fundamentals that also influence the Fed's interest rate policy.

In other words, the Fed typically begins rate hike cycles during periods of sustained, strong economic growth, leading to a return of inflationary pressures and a decline in unemployment, which aligns with strong commodity demand, especially when supply struggles to keep pace, leading to inventories being drawn down to low levels.

However, the 2022/23 rate hike cycle is different.

It arrived relatively early after the recession triggered by the COVID-19 pandemic, and the Fed found itself far behind the curve, as initial inflationary pressures from pandemic-related supply chain disruptions and crisis-driven fiscal and monetary stimulus were exacerbated by soaring energy, fertilizer, and food prices following Russia's invasion of Ukraine in early 2022.

Thus, supply-side pressures played an outsized role in prompting the Fed to raise rates relatively quickly by over five percentage points.

This also meant that the commodity sector entered this recent rate hike cycle from abnormally high levels.

Concerns over Russian commodity shipping supply being disrupted by sanctions drove the BCOM ER index up by 25% in the first quarter of 2022.

However, overall, supply chains proved to be more resilient than initially feared, and by mid-2022 (even earlier for some commodities), this supply risk premium began to erode significantly.

Since then, while the recession fears indicated by the inverted yield curve never materialized, global manufacturing PMI did drop below 50 in September 2022 (and remained in contraction territory throughout 2023), dragging down broader industrial demand and exacerbating the bearish commodity price trends during the 2022/23 rate hike cycle (Figure 5).

Figure 5: J.P. Morgan Global Manufacturing PMI vs. U.S. Federal Funds Target Rate (Upper Bound)

The rate hike cycle may seem reminiscent of 1999, but the commodity response risks replaying the 2022 script.

As reflected by last week's hawkish dissent, given the tightening labor market and persistent inflation, Fed members have questioned the restrictiveness of the current policy stance.

According to our U.S. interest rate strategist, various measures of the real neutral rate suggest that a tightening of 50-100 basis points in policy rates is needed for a mid-cycle adjustment to re-establish a restrictive stance in the absence of reduced inflation.

In their view, this makes the mid-cycle rate hike adjustment from June 1999 to May 2000 (particularly the tightening phase from November 1999 to May 2000) a comparable analogy to the current situation.

Strong Commodity Returns in 1999/2000, but the Setup in the Commodity Market Looks Very Different.

The 1999/2000 rate hike cycle delivered the strongest cumulative commodity returns in our admittedly small sample, with the BCOM ER rising by 25% during the rate hike cycle, driven by a significant increase of over 70% in the BCOM energy sub-index.

However, context is crucial.

First, the broad commodity sector was severely depressed entering this rate hike cycle.

In the first half of 1999, following the demand and risk sentiment shocks from the Asian financial crisis/Russian financial crisis/Long-Term Capital Management (LTCM) collapse, the BCOM stabilized at levels about 35-40% lower than the peak in 1997.

Second, and importantly, the supply surplus and low prices prompted OPEC and participating non-OPEC countries to commit to significant production cuts in late 1998 and early 1999.

Thus, the significant outperformance of commodities (primarily driven by the rebound in energy prices) can largely be attributed to a substantive rebalancing of the oil market under stronger supply discipline.

With this historical context, while the Fed's backdrop may seem reminiscent of 1999, the commodity market environment is more akin to 2022.

The current renewed inflationary pressures coincide with significant supply chain disruptions, as shipping through the Strait of Hormuz remains obstructed.

Thus, with rising energy prices and production costs across the sector, the BCOM index overall remains close to historical highs from the first quarter of 2022, rather than entering this rate hike cycle from a depressed starting point.

Therefore, while the magnitude of any upcoming rate hike cycle may be much smaller than in 2022/23 (when rates initially moved up by 5 percentage points from the lower bound), risks still exist:

The potential fading of supply disruption premiums may again coincide with adverse factors from a tighter financial environment, leading to a more subdued cooling of the commodity sector in any upcoming rate hike cycle.

In this context, the micro fundamentals and the specific sensitivities of each sector to interest rates will be crucial for the remainder of 2026:

· Energy:

Flows through the Strait of Hormuz and China's oil import demand may outweigh the impact of interest rates.

Our bearish baseline forecast for oil suggests that over the next 12 months, although there remains significant upside tail risk if inventory buffers suddenly tighten again due to prolonged disruptions through the Strait of Hormuz.

Our baseline forecast assumes that Middle Eastern supply gradually recovers throughout the remainder of 2026, with Brent crude prices averaging $80 per barrel in Q4 2026, before falling to an average of $63 per barrel as supply oversupply returns in 2027.

That said, this forecast heavily relies on the recovery rate of flows through the Strait of Hormuz and the eventual normalization of inventories (Figure 6).

Even in the case of weak Chinese imports, for every month the conflict extends, if flows through the Strait fall short of expectations, the fair value of Brent crude could increase by about $7-8 per barrel, and if disruptions extend to three months, the monthly average price could rise to about $114 per barrel.

Figure 6: Projected Oil Inventory Drawdown and Accumulation

· Precious Metals:

The most bearish exposure to further Fed action.

Gold prices are currently fluctuating between $4,000 and $4,200 per ounce, about 25% lower than the peak in January 2026, already feeling the significant pressure from higher real yields and the shift in Fed rate hike expectations.

While the sector performed poorly during the 2022/23 rate hike cycle, the ultimate damage was surprisingly mild given the aggressiveness of the rate hikes.

However, at that time, prices were significantly supported by emerging central bank gold purchases driven by emerging markets, offsetting the outflows from interest rate-sensitive ETFs and leading to a decoupling of gold prices from real yields.

The question now is whether the broader freeze in demand from other sectors (with central bank purchases narrowing significantly, retail interest concentrated elsewhere, and weak physical demand from private banks and Asia) will again bring interest rate-sensitive ETF demand back to the driver's seat for gold prices.

Thus, a more violent market shift to price in nearly two additional rate hikes beyond what is already anticipated in the OIS forward could push gold significantly below $4,000 per ounce, triggering further technical breakdowns, pointing to gold prices potentially falling to $3,500-$3,600 per ounce.

Figure 7: Gold Prices vs. U.S. 10-Year Real Yield Levels, Daily

· Base Metals:

Currently looking robust, but PMI needs to be monitored. Although still below the war-induced highs reached earlier this year, industrial metals are approaching their highest levels since 2022 as they enter the upcoming rate hike cycle.

This feels reasonable at the moment.

The global manufacturing PMI has risen above 52 since March, and while there was a slight slowdown in June and July, it still indicates a strong pace of global manufacturing expansion.

On the micro side, LME-registered copper inventories have now fallen below 100,000 tons amid the ongoing U.S.-China battle for refined copper, and our analysis shows that historically, price behavior below this level has been asymmetrically bullish.

Our baseline forecast for industrial metals remains bullish for the second half of 2026, with the highest confidence in copper, as tight mine supply, low inventories outside the U.S., and this bipolar competition for copper units tilt the fundamental risks to the upside, pointing to $15,000 per ton.

That said, overall, the Fed's more aggressive rate hike cycle risks could ultimately echo similar to 2022 for the sector early next year, especially if we see a resulting supportive manufacturing trend fade, coupled with ongoing adverse factors from a potentially strong dollar.

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