Tuesday, January 18, 2011

Industrial Commodity Prices

Our favorite indicator of global industrial activity is the CRB raw industrials spot price index. It has been in a vertical ascent into record high territory ever since the Fed started to discuss QE-2.0 late last summer. The index includes the following 13 commodity prices: burlap, copper scrap, cotton, hides, lead scrap, print cloth, rosin, rubber, steel scrap, tallow, tin, wool tops and zinc.
While it is widely believed that rising commodity prices are bad for profits, this chart shows that the y/y growth in 12-month forward earnings of the S&P 500 is highly and positively correlated with the y/y change in the CRB raw industrials spot price index. Rising commodity prices may squeeze some companies’ profit margins, but many others can pass them through to prices or offset them with productivity gains. In addition, commodity-related industries certainly benefit from higher commodity prices. (These charts are updated regularly for subscribers in our High Frequency Economic Indicators.)




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