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Our Materials Price Index (MPI) rose 0.5% last week, its second
consecutive gain. Once more the commodity complex was driven upward
by rallying oil prices, leading to a narrow rise in the MPI; only
four sub-indexes increased last week, while five fell and another
stayed flat. Oil prices increased 1.7%, supporting freight and
chemical markets.
Several oil market developments have raised supply concerns,
pushing prices higher over the past two weeks. Market watchers are
becoming skeptical that increases in OPEC production will offset
supply losses from Venezuela and Iran, raising concerns that a
market deficit is ahead. Adding to the nervousness are ongoing
supply outages in Canada and Libya, along with growing concerns
over trade tensions between the United States and China. The
strength in oil markets has pushed downstream to freight and
chemical markets, as evidenced by their respective price movements
last week. In addition to rising feedstock costs, demand conditions
are also improving for chemicals; ethylene prices increased 9.9%
last week as on ramping up derivatives production.
Macroeconomic data released last week continued to point to
peaking global growth. The Eurozone PMI Manufacturing Index showed
its weakest activity in eighteen months as export activity declined
and business optimism sank. The Chinese General Services PMI report
indicated a pickup in the service sector; however, we continue to
see a slowdown in industrial activity. In the United States, the
Bureau of Labor Statistics reported another month of brisk job
growth, further bolstering the case for tighter monetary policy
from the Fed. As global growth conditions peak, the commodity
complex has limited growth potential. Once the rally in oil markets
loses its steam, be on the lookout for a retreat in commodity
prices.