Commodity prices seem to be falling
just about everywhere, and in all classes. The virtual collapse of oil is well
publicised. Those with an interest in Forex, as we are, will be well aware of
the effect that rapidly declining Iron Ore prices are having on the Australian
dollar, in particular. The softer commodities, too, for example beef and dry
powdered milk, are also causing problems for producers of the raw materials
that go into them.
The reasons for all of this amounts
to something of a perfect storm for suppliers. Slowing demand, particularly
from China, is a significant factor. New Zealand milk producers were among the
first to experience this, and their problem has been exacerbated by new entrants
into the supply chain, coming both from their near neighbours in Australia and
from as far afield as Ireland, all encouraged by apparent buoyant demand which
started to disappear just as the they had geared up to provide product.
The supply side is also a major
factor in oil price decline. Shale oil production in the USA has not only
helped the US economy, but has also caused the traditional oil nation suppliers
to have to rely on other markets to dispose of the crude that shale has
displaced. So in many instances, supply has reached an increased level at the
very time when demand has softened. Prices will always fall in such
circumstances.
But there is also a macroeconomic
dimension. A great many of the world’s commodities are priced in US dollars,
both for physical product and for the futures contracts that are used by buyers
and sellers to hedge their risk, and by traders for speculative purposes.
Whatever about the outcome of the latest FOMC meeting, Quantitative Easing has
come to an end, which means the end of easy money (US dollars) and a rise in US
interest rates. The history of core interest rates in the US indicates that
when they go up, the US dollar strengthens and commodity prices fall. The only
difference this time around is that, at the same time that US rates are about
to rise, the supply and demand dynamic has also become critical. Hence the idea
of a perfect storm.
Outside of the USA, there has to be
comfort in the thought that low prices for commodities, for all that they feed
into the deflationary tendencies that are so feared by central bankers, will
also place more spending power in the pockets of consumers, and thereby hasten
the day when the economic upturn that the US seems to be embarking on will
spread to the rest of the world.
Yellen:
“A couple means two”
The FOMC press conference after the monetary policy statement last evening (GMT) was an assured affair. The Chair of the Federal Reserve, Janet Yellen, was meticulous in her comments and in her answers to questions from assembled journalists. She handled the whole thing herself - there were no acolytes in attendance, unlike in the case of both her ECB and Bank of England counterparts at similar events.
The major currency pairs that involve
the US dollar jumped about a bit after the statement and during Ms Yellen’s
comments (we were out of the market for the duration), but then settled into a
strengthening bias as far as the Greenback was concerned. And well they might.
The clear message was “Steady as she goes”. The recovery in the US is well under
way. The committee is not concerned either about low inflation, nor falling oil
prices. They still see some slack in the economy, but labour force participation
rates are on the right track, as are employment trends.
In the current FOMC scenario,
interest rates will begin to rise when a “couple” more FOMC meetings have taken
place. Ms. Yellen very helpfully confirmed, for an enquiring journalist, that
she subscribed to the dictionary definition of a “couple”, as meaning two. The
FOMC meeting schedule for 2015 is above. As can be seen, each alternate
gathering is concerned with a Summary of Economic Projections and is followed
by a press conference. She was at pains to point out that interest rate rises
could take place without a press conference, but the clear expectation of all
now is that the middle of 2015 will see the US embarking on a normalisation of
monetary policy, i. e. a gradual rise in core interest rates.
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