Commodity prices move broadly higher
Scott Grannis, Economist at Western Asset Management, pips up re commodity prices...
"This week the Journal of Commerce index of commodity prices reached a new, all-time high. And it's not just because energy prices are sky-high. All of its four sub-indices have moved substantially higher in recent weeks. The "miscellaneous" index (hides, rubber, tallow, plywood, red oak) has moved up 16% since the end of July (so this is not just a Katrina phenomenon either). Industrial metals are up 12% and the petroleum index is up 19% in the same period. Agricultural commodities, particularly the grains, look to be the softest--most grains are down over the past month or so.
"The commodity story is actually a two-sided tale. Most of the increase in commodity prices that we observe here in the U.S. since they bottomed in November 2001 is due to the weakness of the dollar, and only part of the rise in commodity prices is therefore due to a fundamental supply-demand imbalance (i.e., strong growth).
"The chart (above) illustrates this story. Commodity prices are up the most in yen and dollar terms, mainly because those are the only two currencies with central banks that have been actively pursuing accommodative policy in recent years. Commodity prices are only up modestly in Euro and Australian dollar terms. The Reserve Bank of Australia has been for the most part pursuing restrictive policy in recent years, culminating in a strong currency, 5% short-term rates, a flat yield curve, and a weakening property market. The AUD has been stable against gold throughout this same period that commodities have been rallying. That further underscores how commodities are sending an inflationary signal in the U.S.
"The most recent surge in commodity prices began in early August, and is reflected in all currencies. This suggests that global demand for commodities is picking up, with the further implication that the global economy is reasonably healthy."
"This week the Journal of Commerce index of commodity prices reached a new, all-time high. And it's not just because energy prices are sky-high. All of its four sub-indices have moved substantially higher in recent weeks. The "miscellaneous" index (hides, rubber, tallow, plywood, red oak) has moved up 16% since the end of July (so this is not just a Katrina phenomenon either). Industrial metals are up 12% and the petroleum index is up 19% in the same period. Agricultural commodities, particularly the grains, look to be the softest--most grains are down over the past month or so.
"The commodity story is actually a two-sided tale. Most of the increase in commodity prices that we observe here in the U.S. since they bottomed in November 2001 is due to the weakness of the dollar, and only part of the rise in commodity prices is therefore due to a fundamental supply-demand imbalance (i.e., strong growth).
"The chart (above) illustrates this story. Commodity prices are up the most in yen and dollar terms, mainly because those are the only two currencies with central banks that have been actively pursuing accommodative policy in recent years. Commodity prices are only up modestly in Euro and Australian dollar terms. The Reserve Bank of Australia has been for the most part pursuing restrictive policy in recent years, culminating in a strong currency, 5% short-term rates, a flat yield curve, and a weakening property market. The AUD has been stable against gold throughout this same period that commodities have been rallying. That further underscores how commodities are sending an inflationary signal in the U.S.
"The most recent surge in commodity prices began in early August, and is reflected in all currencies. This suggests that global demand for commodities is picking up, with the further implication that the global economy is reasonably healthy."
posted by David M Gordon | 4:11 PM
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