OVERVIEW AND CONCLUSION
The Federal Reserve Board is a widely-watched star economic performer. Elvis Presley sings in “Jailhouse Rock” that “Everybody in the whole cell block Was dancin’ to the Jailhouse Rock”. The Fed’s actual and anticipated soulful lyrics and mesmerizing policy moves likewise attract, enthrall, and inspire Wall Street, Main Street, and political audiences. The Federal Reserve Board congregates 10/27-28/15 and 12/15-16/15.
Though major stock, interest rate, and currency marketplaces typically grab the lion’s share of marketplace and media attention, recently commodities “in general” have marched to center stage alongside them. Central bankers, finance ministers, and other leading economic players pay close attention to the analysis and forecasts of the International Monetary Fund. October 2015’s featured cover page titles of the IMF’s “World Economic Outlook” (“Adjusting to Lower Commodity Prices”) and “Fiscal Monitor” (“The Commodities Roller Coaster”) evidences this increased fascination with commodities.
Individual commodities such as crude oil, copper, and corn, as well as commodity sectors such as the petroleum complex, of course have their own supply/demand and inventory pictures. Perspectives on these can and do differ between observers. Yet commodity price trends in general are hostage not only to their own supply/demand situation and general economic growth trends, but also to movements in equities, interest rates, and foreign exchange. Particularly over the past several months, stock and other financial playgrounds more closely have intertwined with noteworthy travels in crucial commodity theaters such as petroleum and base metals. Such increasingly strong ties developed in the past during similar sustained dramatic commodity price adventures.
The current significant link between commodities in general (use the broad Goldman Sachs Commodity Index as a benchmark; the “GSCI” is heavily petroleum-weighted) and other key arenas such as the S+P 500, emerging stock marketplaces in general (“MXEF”; MSCI emerging stock markets index, from Morgan Stanley), and the broad real trade-weighted United States dollar (“TWD”) probably will persist at least for the next several months. Stocks, the dollar, and the GSCI probably will all move in a sideways path for the near term. The Fed and its allies do not want the S+P 500 to collapse twenty percent or more (and maybe not even much more than ten percent) from its May 2015 summit. They also do not want the TWD to break out above its September 2015 high (that barrier slightly exceeds the crucial March 2009 major top).
However, the bear move in the S+P 500 that emerged in May 2015 eventually will resume. The US dollar, though its rally from its July 2011 major low has paused, will remain relatively strong. OECD petroleum industry inventories in days coverage terms are very high from the historical perspective. Despite some crude oil production cuts in the United States and elsewhere, overall oil industry inventories likely will remain quite elevated through calendar 2016. So even if in the near term the broad GSCI rallies further from its current level (which likely would occur alongside a further modest S+P 500 ascent and dollar slide from their current altitudes), it probably ultimately will challenge its late August 2015 low.
As the enrapturing Goldilocks Era ended, stocks peaked before commodities. The S+P 500’s major high was 10/11/07’s 1576, with that in emerging marketplaces (MXEF) alongside it on 11/1/07 at 1345. The broad GSCI made its major peak on 7/3/08 at 894 (the Bloomberg Commodity Index (“BCI”) top also was on 7/3/08, at 238.5). However, this was close in time to the S+P 500’s final peak at 1440 on 5/19/08 (and the MXEF’s final top at 1253 on 5/19/08), and not long after the TWD’s important April 2008 low near 84.2 (Fed H.10; monthly average). The GSCI’s 2/19/09 major low at 306 (BCI bottom 2/26/99 at 74.2) occurred near the S+P 500’s major bottom, 3/6/09 at 667, which occurred alongside the TWD’s March 2009 major top at 96.9. The MXEF’s major trough occurred 10/28/08 at 446, its final low 3/3/09 at 471.
During the worldwide economic recovery that set sail around 2009, neither commodities in general nor the MXEF surpassed their 2008 plateau.
The major high in commodities in general and the MXEF (spring 2011) and their important 2014 interim tops occurred before the S+P 500’s May 2015 height. This pattern differs from the 2007-08 one. In late spring 2015, the S+P 500 (as did China’s Shanghai Composite stock index) nevertheless joined (encouraged) the slump in the MXEF and commodities alongside an acceleration of US dollar strength. Thereafter, as in the speeding up of the global economic crisis after around mid-2008, the S+P 500, MXEF, and broad GSCI retreated together in conjunction with TWD appreciation. Also note the similar late August 2015 troughs in commodities and stocks. Though more recent data from the Fed on the TWD eventually will emerge, key US dollar cross rates in the past couple of weeks hint the broad TWD perhaps has slipped a bit since its September 2015 high.
Is OPEC’s new policy of reducing high-cost (non-OPEC) production succeeding? Some, but not a great deal so far. Despite the dive in drilling rig counts, OECD days coverage levels and the worldwide supply/demand balance for 2015 and 2016 reveal plentiful petroleum.
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Commodities- Captivating Audiences (10-12-15)