​The GDP number confirms that the Eurozone ecomonic recovery is well underway, however, it hasn't been an easy ride. Supply chain issues are still impacting certain areas of the economy and the vaccine rollout hasn't progressed as quickly as expected, however, demand has been strong.

Those supply chain issues really impacted the German economy more than other countries and this was largely the result of it's large car industry, which has been particularly hard hit. Countries that are further behind pre-pandemic levels like Italy and Spain saw impressive growth rates of 2.7% and 2.8%, respectively.

Looking forward to the third quarter, we can see that the Delata variant is causing some issues with the possibilitiy of more restrictions being enforced. In addition, supply chain problems continue to impact manufacturing production and these factors could cause some headwinds. Having said that, the economic recovery is expected to continue across the Eurozone, with tailwinds provided by strong demand both domenstically and internationally.

​The recent release didn’t provide much evidence of more structural inflation as core inflation fell back from 0.9% to 0.7%. However, in Germany core inflation rose strongly as a result of VAT effects but other countries have seen a drop that more than counteracts this effect.

Non-energy industrial goods inflation, which has been rising over recent months, fell back to 0.7% from 1.2%. So what does this tell us? Well, it indicates that the price pressures related to transport costs and input shortages are not yet translating into increasing consumer goods prices. Services inflation only increased from 0.7% to 0.9%, which is a small increase. However, it is still highly probably that we'll see goods and services inflation heading higher so this adds to the upside inflation risk in the months ahead.

Another important factor is the labour market and that really needs to perform well in the months ahead. The unemployment numbers came in today showing that unemployment declined to 7.7%. This confirms that the labour market is getting tighter on reopening. Its worth noting that the ending of furlough schemes could impact these numbers, however the current status of the job market may well add some more upside risk to inflation over the medium term.

However, Fed Chair Jerome Powell is sticking to his story that inflation pressures are largely transitory and there is no need to signal an imminent shift in policy. Today's FOMC statement reiterated this position but we also see the hints that the Fed will start to taper later this year. The Fed funds target rate has been left at 0-0.25% with the monthly QE asset purchases left at a total of $120bn with a split of $80bn Treasury securities and $40bn agency MBS.

In previous statements, it was stated that these purchases would continue until “substantial further progress has been made” towards achieving maximum employment and the Fed consistently hitting its inflation target. However, the Fed has seen the data and knows that the “the economy has made progress towards these goals”. This is a significant step in the policy normalisation process.

With that said, the employment level in the U.S. remains more than 6 million lower than before the pandemic and with growing uncertainty about the trajectory and impact of the Delta variant, we don't think that tapering is imminent. We are just seeing a slow march towards this innevitable outcome as more FOMC members express their viewpoints on inflation running too hot.

Indeed, the Fed’s own 'dot plot' chart of individual members' predictions for the interest rate path has seven out of 18 FOMC members looking for a 2022 rate rise. It only takes three of the 11 members not favouring a 2022 rate hike as of June to switch sides to bring the medium in favour of action next year rather than 2023. 

To add fuel to the fire, the strong stimulus fuelled demand and suply side issues are leading to more persistent price pressure. The supply side is not keeping up with demand and hampering the recovery. This could show up in tomorrow's GDP data. In addiiton, the difficulties in finding workers to fill vacancies continues and this is leading to wage pressures

The June FOMC meeting saw Fed members shifting their collective view to 2023 as a starting point for interest rate increases. Its interesting that not so long ago, Fed members had their sights set firmly fixed on 2024 for the next rate hike. How things have changed thanks to an economy that is continuing to grow strongly and inflation running hot. However we look at this, tapering is widely accepted and expected now. Its unlikely that the Fed will be able to surpise the market in the coming months. Indeed, the rather muted reaction in the FX market to the FOMC statement signalled that a slightly more hawkish message was largely priced in. 

​Spring wheat harvest is slated for an earlier start this year with 97% of the crop already headed out – if it was able to reach that stage amid the ongoing heat stress. As of July 25, 3% of the crop had been harvested with the majority of combining activity centering in Washington (12% complete) and South Dakota (21% complete).

The dry weather has allowed combining rates for winter wheat crops to accelerate as harvest activity moves further north. The USDA estimates 84% of U.S. winter wheat acres were harvested as of Sunday, up 11% from the week prior thanks to limited rainfall and 3% ahead of the five-year average.

Soft red winter wheat yields and protein are largely in line with 2020 results as the last fields in Northern Michigan are harvested. Hard red winter wheat yields have been more variable across the Plains, but early estimates suggest protein contents could rise above five-year averages thanks to dry growing conditions.

Soft white winter wheat harvest in the Pacific Northwest ramped up over the past week, with nearly 20% of the crop out of the field as of late last week. But severe drought will likely reduce the number of acres harvested this year and early protein estimates point to variable results for millers.

According to NOAA's short-range forecast, there is an end in sight for the recent heatwave. Hot and dry weather will likely dominate the forecast early this week but temperatures are expected to moderate across the Corn Belt by Thursday. The cooldown is good news for crops. 

Prices in the deferred contract months approached the $14/bushel benchmark. Meanwhile, in the crop progress report, the USDA decreased the weekly ratings for soybeans by 2%, with 58% of U.S. soybeans in good to excellent condition. Trade estimates had pegged the total between 59% and 62%. 

Heat stress continues to accelerate crop development above historical benchmarks. As of July 25, 76% of 2021 soybeans were blooming, up 13% from the week prior and 5% ahead of the five-year average. About 42% of soy plants were setting pods as of Sunday, which is a 19% weekly increase and 6% ahead of the five-year average.

The falling condition rating, which is largely a result of the heat wave across the Upper Midwest last week, is not good news for farmers still hoping for average yields this year. Soybeans typically do not pollinate until early August so farmers are hoping that conditions improve before this critical reproductive stage. If conditions do improve, there is a higher chance of larger yields to market later this fall.

​This week has been a week of blistering heat and dry weather but this hasn't derailed the pollination progress as silking rates increased 17% from the previous week to 79% complete as of July 25. About 18% of the nation’s corn crop has reached the dough phase of maturity, up 10% from the previous week and 1% ahead of the five-year average. However, it might be too early to gauge the impact of heat stress on the pollination process. The USDA report showed nationwide corn ratings 1% lower on the week to 64% good to excellent. The trade had expected this to fall between 64% and 66% good to excellent.

Drought conditions continue in the Upper Midwest, Plains, and Pacific Northwest cand there are reports of short to very short soil moisture levels in the regions over the past week. While there have been scattered rain showers over the past week and this benefited some fields in the Midwest, many radar screens did not show true rainfall amounts. Its just too hot and there's not enough rain.

There is also news of another cold front heading towards the coffee growing regions toward the end of the week so this continues to provide volatility to the futures markets.  It was a firmer day on the commodity markets in general yesterday and we saw the US Dollar lose ground to a basket of other currencies. A weaker US Dollar is seen to be a bullish factor for many of the US Dollar based commodity markets when trading in other currencies.

The Sugar, Cocoa, Coffee, Corn, Soybean, Silver, Platinum and Palladium markets ended the day on a positive note, while the Wheat and Gold markets ended the day on a softer note. The New York and London coffee markets were off to a positive start yesterday and were supported by the further news of another possible frost event in Brazil providing additional upside momentum following on from the rally last week.

Both markets were seen to hit a resistance level during the early afternoon session as the markets dropped back from the highs made earlier in the day. Towards the close, the markets rallied again and both the New York and London coffee markets closed on a positive note. reaching the highest close in close to seven years.

​This is following close on the heels of the water deficit, from which the crop has been recovering, but now it is suffering from low temperatures. However, more cautious agronomists are waiting a few days before making a more infomred decision on the actual impact of the frost. There are other experts saying that the sugarcane impacted by the frost needs to be harvested immediately so that it won’t lose quality.

In Sao Paulo, following the frost damage, the sugarcane crops in Brazil will be further affected due to the new polar air mass that is set to move over the country’s agricultural areas this week. According to weather forecasters, thre is another wave of cold that will impact the crops in Brazil this winter, which is a rare situation and not seen in the country in decades. Brazil has already witnessed the worst drought in 90 years. If it turns out that the sugar crop fails because of the frost damage, the price curve for the 2022/2023 and 2023/2024 sugar futures markets in New York will increase. 

On teh demand side of the equation, we have numerous factors such as the recovery of the post-pandemic world economy, the increase in per capita sugar consumption in the main consuming countries, the resumption of the domestic consumption of fuel whose prediction is at 7%, and the energy policy in India focusing on ethanol production. All of these factors are driving demand upwards. With increasing demand and tightening supply, we have a recipe for higher prices and possibly a bull market.

​​The March/August spread is now at a premium of 62.9 cents and this tells us that the market is under-supplied with high demand. Prices for natural gas are soaring across the globe as hot weather has people reaching for the air conditioners and cranking them up a notch. So the rally is primarly driven by the heat. Temperatures are expected to soar to 101 Fahrenheit (38 Celsius) in Dallas as soon as Monday, the National Weather Service said, breaking the 100-degree mark for the first time this year.

However, in the U.S., the rally is also underpinned by concern about a potential supply shortfall in the winter, when gas consumption peaks as homes and businesses turn up the heat. Natural gas stocks are already below nornal for this time of year and this comes at a time when we are seeing supply constraints.

Exports are also contributing to tight gas supplies. In May, the U.S. shipments of liquefied natural gas (LNG) exceeded Australia’s for the first time ever as buyers around the world continued to purchase record amounts of LNGl. IN addtion, we also delvieries to Mexico from the U.S. via pipeline reach record highs in the following month. 

In the U.S. gas in underground storage is 6.2% below normal for the time of year, according to government data. The market is set to head into the winter with the least amount of gas in storage we've seen in many years.

OPEC+ will schedule a new meeting, after the UAE successfully secured a higher production baseline. This baseline has been a bone of contention and really put the cat amongst the pigeons at last week's OPEC+ meeting. Getting past this conflict will allow OPEC+ to move forward with the planned production increases and restoring supplies in installments of 400,000 barrels a day through to late 2022.

Market demand is strong and can consume this increase in production. American crude inventories declined substantially again last week, according to an industry report published ahead of the Energy Information Administration  (EIA) data that will be released on Wednesday. In fact, gasoline and diesel demad have returned to pre-pandemic levels.

As the vaccine rollout progresses in the US and in Europe, with restrictions lifting and economies opening, we've seen oil rally more than 50% this year. Futures prices are showing a premium on nearer-term contracts, known as backwardation, which typically  indicates tightness. Indeed, the International Energy Agency warned on Tuesday that the market will tighten significantly if the OPEC+ alliance doesn’t resolve the standoff. 

However, even if OPEC+ does resolve the conflict, the world is facing a growing threat from the spread of the Delta coronavirus variant. Indonesia posted a record number of positive cases, and in the UK, cases are soaring, while Sydney extended a lockdown.

The American Petroleum Institute said crude inventories slid by more than 4 million barrels last week.  The Energy Information Administration is expected to report a similar reduction later on Wednesday, according to a Bloomberg survey. That would be an eighth straight weekly draw, the longest run of declines since January 2018 and a very clear indication of strong demand as the recovery build momentum.