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Our Materials Price Index (MPI) fell 0.9% last week mainly due
to an overdue correction in lumber prices. This is the first weekly
fall in the MPI since late April, illustrating the strength of the
recent move in commodity prices. This continuing strength in the
commodity complex can still be seen in the MPIs other nine major
components, eight of which rose last week.
Lumber was the big story of the week as it fell 25.7%, with spot
prices dropping from $915 per thousand board feet to $682. Despite
concerns around wildfires in the Pacific Northwest, commercial
timber acreage remains largely undamaged with loggers now
returning. Meanwhile delivery times are shortening and with falling
prices in the market, participants are happy to wait on the
side-lines. Freight was the only other component of the MPI to
decline last week, falling 2.3% on softening of iron ore prices,
which dropped back mid-week to $122 /Mt and look set to move lower.
Energy prices rallied 3.5% after recent weakness. Coal prices
jumped 6.8% as Chinese buyers re-entered the market despite
no-change in the import quota policy. The end of the monsoon season
also prompted better Indian buying. Oil rose 3.2% last week in part
making up the ~10% fall the week before. Brent is sitting around
$41.5 /bbl weighed down by the ongoing threat of second rounds of
lockdowns in Europe and elsewhere. Rubber prices bounced back by
2.7% on improving European car sales data that showed sales down
17% y/y in August vs. -24% in June and -57% in May.
Equity markets slipped again at the end of last week as the US
Federal Reserve disappointed markets by leaving the current QE
programme unchanged, not expanding the bond purchase programme as
the market expected. On the other hand, the Fed also projected that
interest rates in the US were likely to hold steady until at least
2023 and reiterated its commitment to the 2% inflation target with
the caveat that it is willing to accept a temporary period of
slightly stronger inflation. This is a double-edged sword for
commodity prices. The less expansive QE programme tightens
liquidity, potentially stymieing growth. But a near zero interest
rate, and the potential for higher inflation, suggests a weaker US
dollar out to 2023, normally inversely correlated to commodity
prices. We maintain that the slow recovery of industrial output and
existing overcapacity will weigh on commodity prices in the coming
months.
Posted 22 September 2020 by Mr. William May, Senior Economist Pricing and Purchasing, IHS Markit