Inflation Clues from the Baltic Dry Index

Inflation has everybody worried sick … Worried sick that the Federal Reserve is going to be forced to spoil the economic growth party by raising interest rates to combat inflation.

Coin stock with red arrow representing inflation.

Source: Anton Watman/

But what if the inflation we are seeing right now in the global economy isn’t going to last?

What if it’s a short-term phenomenon driven by the global economy’s response to the coronavirus pandemic?

What if everything is going to balance out once we get through this adjustment period?

If that’s the case, maybe we don’t need to worry so much about the Fed right now.

But what indicators should we watch for clues that will tell us if inflation in the global economy is moderating, or not?

We’re going to be watching ships … Big ones.

Inflation Clues: The Baltic Dry Index (BDI)

The Baltic Dry Index (BDI) measures what it costs to ship raw materials like iron ore, steel, cement, coal and so on around the world.

As global demand for goods that need to be shipped across the ocean rises, the BDI goes up. As global demand falls, the BDI goes down.

The London-based Baltic Exchange calculates the BDI each day. To compile the index, members of the Baltic Exchange call dry bulk shippers around the world to see what their prices are for 22 different global shipping routes.

Once they have obtained these numbers, they compile them and find an average.

To ensure they are getting a comprehensive view of the entire shipping industry when looking at various shipping costs, the Baltic Exchange looks at costs for each of the following three sizes of ships:

  • Capesize: Ships that can carry 100,000+ dead-weight tons of cargo and are too big to pass through the Panama Canal
  • Panamax: Ships that can carry 60,000-80,000 dead-weight tons of cargo and can barely fit through the Panama Canal
  • Handymax, or Supramax: Ships that can carry 45,000-59,000 dead-weight tons of cargo

Why Investors Watch the Baltic Dry Index

The Baltic Dry Index is a leading indicator that provides a clear view into the global demand for commodities and raw materials.

The fact that the BDI focuses on raw materials is important because demand for raw materials provides a glimpse into the future.

Producers buy raw materials when they want to start building more finished goods and infrastructure like automobiles, heavy machinery, roads, buildings and so on. Producers stop buying raw materials when they have excess inventory and when they stop infrastructure projects.

Typically, demand for commodities and raw goods increases when global economies are growing. For investors, knowing when the global economy is growing is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should increase.

Conversely, demand for commodities and raw goods decreases when global economies are stalling or contracting. For investors, knowing when the global economy is contracting is helpful because that means stock prices, commodity prices and the value of commodity-based currencies should decrease.

Currently, producers are scrambling to get the raw materials they need to make enough product to meet demand.

They’re scrambling because they all cut back on inventory during the pandemic. Now that the pandemic is easing and demand is surging, they’re woefully short on supply.

This isn’t going to last forever, though. Producers are eventually going to catch up to demand. At that point, they won’t need to pay a premium to get materials as soon as possible. They will have the flexibility to wait and demand better prices.

So what is the BDI telling us now?

After bottoming out at a low of 400 during the peak of the 2020 global economic shutdown, the BDI has been steadily climbing. It broke above the high of 2,518 the index reached in 2019 on its way to forming a recent high of 3,266 on May 5 (see Fig. 1 below).

Daily Chart of the Baltic Dry Index (BDI) From March 2019 to June 2021.

Source: Daily Chart of the Baltic Dry Index (BDI) – Chart Source: TradingView

The BDI is currently sitting at up-trending support, which is just below its September 2019 high. This will likely be a key inflection point for the index.

If it bounces back up off this level, that would be a good indication that demand is still strong and prices are likely to remain high in the near term.

However, if the BDI breaks down through this up-trending support level and moves back down toward 2,000, that would be an indication that global demand may be starting to return to normal, which would likely lead to prices pulling back.

The Bottom Line

We are already starting to see inflation fears ease as the BDI pulls back from its recent highs. You can see this in the daily chart of the 10-year Treasury yield (TNX) in Fig. 2 below.

Daily Chart of the 10-year Treasury Yield (TNX) Form December 2020 to June 2021.

Source: Fig. 2 – Daily Chart of the 10-year Treasury Yield (TNX) – Chart Source: TradingView

If the TNX continues to pull back, breaking below support at 1.47%, we’ll know for sure the initial inflation-based panic from this spring has passed.

This should clear the way for the S&P 500 to continue moving higher this summer.

On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it.

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