Sunday, November 22, 2015

Commodities slide and the dead cat bounce | Will impact all monetary policy decisions

The recent stories of both crude oil and Iron Ore, perhaps the most important commodities from the point of view of global commerce, are encapsulated in the charts above. As can be seen, both have been inexorably falling back to the levels that marked the Global Financial Crisis, after moving upward in its immediate aftermath in the expectation that normality was to be re-established as a result, presumably, of the actions of various central banks around the world.

A dead cat bounce is a reference to a hopeless small rise after a fall – just as if a dead cat was dropped from a high building it would bounce off the pavement, but that would not be sign that it had come back to life.

Now it has been reported that the U.K., once a powerhouse of heavy industry and steel making, has called for an E.U. summit to discuss the threat to European steel making from the production and marketing practices of China, where state subsidies and lower Health & Safety and environmental protection legislation have allowed for the dumping of very cheap steel onto the world market.

And in October the IMF saw fit to produce a paper that examined the effects of long-term oil price stagnation on the economy of Saudi Arabia.

Will impact all monetary policy decisions

For the Federal Reserve and the Bank of England, the two factors that most influence core interest rate decisions are employment, or the lack of it, and inflation (or deflation). In the case of the ECB, the only mandate it has is what it calls price stability, for which read inflation / deflation.

The current low and falling inflation regime in global terms is directly related to the price of oil and other hard commodities. As long as the tendency and outlook for the prices of these as outlined above continues, it cannot be seen as likely that, even if the Fed marks a start to a rising interest rate cycle at its December meeting, ongoing rises into the future will continue in any meaningful way, with consequent implications for the value of the U.S. dollar.

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