ECRI Spots Another Commodity Signal That "Signals A Slowdown"

Submitted by ECRI

The latest oil price spike may turn out to be a head-fake, because the economy is already slowing. While the oil cartel can try to fix the supply of oil, it can’t really control the demand side, which is dominated by the economic cycle.

This is clear to us at ECRI because of our enduring focus on cyclical relationships and, in this case, sensitive industrial material prices, including oil. We’ve long maintained a daily price index of these commodities that moves in concert with cycles in industrial growth. About half of the price inputs we monitor are traded on various commodity exchanges, while the rest are priced from commodity producers.

For the past few quarters a very unusual gap has opened up between the two groups, with the prices of non-exchange-traded industrial commodities, which most observers don’t watch, falling, and in some cases plunging. This behavior is in sharp contrast to the bullish sentiment shown, until more recently, by the strength in the prices of commonly-watched exchange-traded commodities. 

As the chart shows, because of their links to industrial growth, exchange-traded and non-exchange-traded commodity price inflation rates have historically moved very much in sync.

But the right-side of the chart shows exchange-traded commodity price inflation spiking up through early this year, driven by widely-watched industrial inputs like oil and copper, while non-exchange traded commodity inflation went straight down into negative territory, as the prices of raw materials like rubber and hides dropped precipitously. This is very unusual.

This undeniable weakness in the non-exchange traded commodity prices is in line with our March Bloomberg View Op-ed, The Global Economy’s Wile E. Coyote Moment, about the end of the 2016-17 synchronized global growth upturn. The current downturn in global industrial growth has caught many people off guard because they focus on exchange-traded commodities only. Doing so made it easier to think that demand wasn’t slowing because surging oil and primary metals prices had camouflaged what was really happening.

ECRI’s insight was that the rise in exchange-traded prices was not about demand, which we knew was slowing. Rather, it was about the confluence of a variety of supply shocks, which weren’t cyclical, and thus unsustainable.

Of course, Saudi Arabia and Russia had deliberately kept oil production in check to support oil prices. But also, aluminum and nickel prices had shot up on fears of U.S. sanctions on Russia. Copper prices had surged due to labor problems at major mines, and rule changes regarding Indonesian tin export permits had also caused supply shortages. Meanwhile, zinc prices were pushed up by the shutdown of major Australian, Irish and Canadian mines and China’s environmental clampdown, which had lifted lead prices. What’s more, those pollution controls also hurt the production of synthetic fabrics, which therefore couldn’t make up for the shortfall in Indian cotton exports caused by pink bollworms eating into the cotton supply. It really was this perfect storm of supply constraints – not the strength of global demand – that drove the earlier run-up in these exchange-traded commodity prices.

Stepping back, the real tip-off came from the earlier downturns in ECRI’s leading indexes of global industrial growth, which were then followed by the yawning gap between exchange-traded and non-exchange-traded commodity price inflation that opened up months ago. It’s only in recent weeks that exchange-traded commodity price inflation has turned down. It’s no coincidence that the Eurozone manufacturing PMI just dropped to a 1½-year low and its U.S. counterpart fell to a seven-month low.

Today, growth in the non-exchange-traded commodity prices remains negative, and growth in the exchange-traded commodity prices is closing the gap by dropping to an 11-month low. With the global industrial slowdown manifesting in all these very short-leading indicators, the market may soon start asking if global demand is all it’s cracked up to be.


Yen Cross Thu, 06/28/2018 - 19:56 Permalink

  Based on my charts, and looking at the divergence in oil/gold silver.

 Also looking at seasonals, overbought specs in metals, and oil, I think the $usd is double topping on weekly charts.

  I'd venture to say, QT is starting to take hold, and strong $usd is very bad for U.S. equities. RUT2000 got hammered over the last 7-10 days.[after insane run-up]

  That doesn't bode well for small cos. and Q-2 GDP is already priced in, after lower revised Q-1 final print.

  Globally> German, Chinese macro continue to decline even with weaker f/x advantages.

CashMcCall Thu, 06/28/2018 - 21:10 Permalink

No, no, no,... no no. Supply and Demand now has nothing to do with the price of oil. I shorted oil before Saudi agreed to raise the output and sold on the announcement that Saudi would raise the output. Why? The largest buyers of oil futures are Goldman and JP Morgan. They dwarf producers and buyers. So they set the prices. Of course, they never take delivery. There are various threats on the Table. China is threatening to Tariff US oil on July 6. Iran is being pushed under sanctions by Trump. If China Tariff's US oil then Shale dies. Saudi could not be happier. Trump blames it on the Chinese. Think about how bizarre Trump's tweets are on the matter... When China threatens to tariff US oil, Trump blows another thin gasket and announced 200 Billion more tariffs against China. He instructed his crack team of Tariff experts, navarro, light in the loafers, Wilbur Mills, and heart attack Larry to mark those down. This raises Geopolitical tensions, the dollar rises and dries up the liquidity of the US Dollar Reserve. Oil rises on Geopolitical tensions not on demand. Oil is a dollar hedge. 

Remember just before the Bush II economy fell like a house of cards, Oil was $140 a barrel. That wasn't demand for oil. Historically the price of oil rises markedly before a recession. Trump is steering the good ship lollypop into a cyclone. Oh but but but this is just a negotiating tool... until the wings get ripped off over the sunny beach of Peppermint Bay where bon-bons play

What is even better is the 4 Dimmential idiot then calls out to Saudi and tell them to reduce the price of oil. Saudi sells less than 8% of US oil imports. Trump should be screaming at Goldman. Notice also that it is Goldman and JP Morgan that keeps saying the GDP is going to skyrocket. They said the same thing in the eleventh hour of the Bush II economy. A month later and it was Tarp Time. 

Mark my words Trump is headed for a recession. Too much debt now 100% of GDP! Trade wars, productivity down. Failed Tax cuts have done nothing to grow any businesses. Corporate debt has skyrocketed. The consumer is tapped out. Agriculture receipts are down 25%. Geopolitical tensions are rising. Trump tariffs are devaluating virtually all emerging market currencies. Even the Yuan is down 6% and the Chinese haven't devalued. They don't have to. Trump is devaluating virtually all the currencies of the world with his tariffs. Trump is the great devaluator.