Raw materials slumped 7.1 percent this year, headed for a fourth annual decline and the longest slump since at least 1991, amid concern that economic growth is weakening as global equity markets lost $1.5 trillion last week.
Data yesterday showed that U.S. retail sales fell 0.3 percent last month on a broad pullback in consumer spending in the world’s largest economy. The Bloomberg Commodity Index (BCOM) fell as much as 0.2 percent to 116.78, the lowest level since mid-2009, and was at 116.87 at 11:25 a.m. in Singapore.
Commodities tumbled 12 percent in the third quarter, the most since the last three months of 2008. Expanding surpluses, the surging dollar and slowing global growth helped drive prices lower, reversing first-half gains spurred by a polar vortex and dead pigs in the U.S., and escalating tensions in Ukraine and the Middle East. China is poised for its slowest expansion in two decades, analysts forecast and weighted heavily on commodity prices.
For the month of September, Credit Suisse Asset Management observed the following:
- Agriculture was the worst performing sector, down 9.54%, led lower by grains, as exceptional growing and harvesting weather has helped support a record crop year.
- Precious Metals decreased 7.55%. Gold and Silver declined as the US dollar continued to strengthen. US monetary policy now seems to be on a tightening course, while other major central banks continue to ease.
- Industrial Metals declined 6.65%, with all constituents posting negative returns due to weaker than expected Chinese economic data. Chinese officials continued to indicate the government would not be increasing stimulus measures to offset recent economic weakness, potentially decreasing the demand for base metals.
- Energy ended the month 4.41% lower, led by Brent Crude Oil, after the International Energy Agency and OPEC both forecasted a weaker outlook for crude oil. OPEC increased its production forecast for non-OPEC producers, while the IEA cut its demand forecast.
China’s consumer prices last month rose at their slowest pace in more than four years, in the latest sign of weakness in the world’s second-largest economy. The figures released on Wednesday by the National Bureau of Statistics reflect sluggish demand conditions, economists said. In a further sign of weakness, China’s producer price index continued its 2½-year decline, an indication of manufacturing overcapacity. “That means that the manufacturing sector continues to struggle with a lack of pricing power, growth and demand,” said Daiwa economist Kevin Lai.
In the Unites States, Senior Fed officials have signaled pretty clearly in the past few weeks that they’re looking at mid-2015 for liftoff from near-zero interest rates. A surprisingly strong job market and improving economic growth has stirred discussion at the Fed about early rate increases, but the confluence of developments weighing on inflation is dampening the urgency in that discussion.
In its latest Commodities Forecast Update report issued yesterday, Danske Bank Markets indicates that a markedly stronger dollar and concerns about the outlook have weighed on demand for commodities over the past month. In the bank’s view, the dollar strengthening is not over yet as the US economy will continue to outperform the rest of the world, eventually leading to the Federal Reserve raising interest rates in 2015. Growth in China, Europe and Japan has weakened and probably will not turn before 2015.
The world economy still hasn’t recovered from the last recession. Moreover, investors lack confidence that policy makers have the tools they would need to avert a new slide into recession after years of throwing everything they have at it to try to encourage recovery and prevent deflation, or falling prices. Coincidentally, commodity prices are declining largely because of supply, but the timing of that decline is bad: it makes the risk of deflation that much more severe.