The topic of "1995 Version" has sparked a major discussion in the commodity market: after the Fed rate cut, commodities surged by 20%.
JPMorgan Chase believes that the commodity market is poised to "recreate" the prosperity of the 1990s, with even stronger growth momentum.
Under the optimistic expectation of interest rate cuts within the year, JPMorgan Chase believes that the U.S. economy is likely to achieve a "soft landing," with the commodity market possibly "replaying 1995" and prices soaring by 20%.
Despite the uncertainty surrounding interest rate cuts so far this year, against the backdrop of economic recovery and declining inflation, investors firmly believe that the Federal Reserve will exit the tightening cycle within the year and look forward to the dawn of a "soft landing."
Recent higher-than-expected inflation data have shattered expectations of an early interest rate cut by the Federal Reserve. Currently, major Wall Street banks like JPMorgan Chase predict that a more accommodative policy is more likely to begin around the middle of the year. Before that, the market will face four tests from CPI data.
This not only evokes memories of the "Great Prosperity" of 1995 - following a series of rate hikes the previous year, the Federal Reserve successfully achieved an economic "soft landing" through moderate interest rate cuts. The Pro UltrPro Shrt S&Pro 500 rebounded by 34.1% that year, maintaining an upward trend until the dot-com bubble burst in 2000.
JPMorgan Chase analyst Natasha Kaneva's team recently released a research report stating that given the overall downward trend in inflation over the past year and historical performance during Federal Reserve rate cut cycles, the commodity market is expected to "replay" the prosperity of the 1990s, or even with more vigorous growth. Key points include:
- Commodities often see positive returns after the first interest rate cut by the Federal Reserve.
- By industry, energy and precious metals tend to show the strongest growth after the Federal Reserve's "first cut."
- The current commodity market shares similarities with the U.S. economic "soft landing" in 1995, when commodities surged by 20% after the Federal Reserve rate cut.
Prices of commodities have risen in previous balance sheet reductions
The report reviews the performance of commodity prices during previous Federal Reserve balance sheet reduction cycles, providing reference for the commodity market performance after the mid-year FOMC meeting.
Historically, commodity prices have generated positive returns before the first Federal Reserve balance sheet reduction, with the upward trend continuing for several months after the rate cut. If JPMorgan Chase's expectation of a rate cut starting in June comes true, the commodity market is in a phase of "significant rebound."
The BCOM ER index has risen in three out of the past five rate cut cycles, with an average return of 4% and a median return of 8%.
In the six months leading up to the Federal Reserve rate cut cycle, the commodity market tends to rebound, with an average increase of 3%, most of which occurs in the 3-6 months before the first rate cut.
After the first rate cut, commodities have on average risen by 4% in the following 9 months. In 1995, it had the best performance, while in 2007, it saw the largest increase.
According to the report, among the five interest rate cut cycles from 1989 to 2019, only 1995 did not experience an economic recession, achieving a "soft landing." Within 9 months after the first interest rate cut in July 1995, the BCOM ER index rose by 20%.
Similarly, in an effort to achieve a "soft landing," the interest rate cut cycle in 2001 significantly impacted the commodity market, with commodities falling by 16% within the first 9 months after the initial rate cut.
Furthermore, the commodity price rebound triggered by the loose cycle in 2007 was the most robust, rising by 32.3% within the first 9 months after the initial rate cut. However, these gains were reversed during the subsequent 2008 financial crisis.
In terms of industries, the energy and precious metals sectors showed the strongest momentum after the initial rate cut.
The precious metals index was the only index that achieved positive returns within the first 9 months after all five initial rate cuts. The report suggests that this may be related to the deepening link between the 10-year US Treasury yield and the price of gold.
Looking at the BCOM ER and its industry-specific price indices, the energy and precious metals indices accumulated increases of 12% and 8%, respectively, within the first 9 months after the initial rate cut, ranking among the top two in all commodity categories.
The energy index had an average increase of 15% during the five interest rate cut cycles, showing the best average performance.
In terms of categories, agricultural commodities had mixed performance, while industrial products lagged behind relatively.
The report states that agricultural commodity indices did not seem to exhibit a significant pattern in the past five interest rate cut cycles: the average return rate within the first 9 months after the initial rate cut was positive, but the median was negative with a large dispersion.
The industrial metals index has been in a "struggling" state before and after the initial rate cut. Within the first 9 months after the initial rate cut, the industrial metals index averaged a 6% decline, making it the only sub-index to decline in the 1995 rate cut cycle.
