Thursday, May 24, 2012

The Dollar & Commodity Prices

I tend to worry about the outlook for global economic growth when the CRB raw industrials spot price index is falling. The same goes for copper, which is included in this index. However, some of the recent weakness in commodity prices is attributable to the strength in the dollar. On the positive side, lower commodity prices can provide a boost to profit margins, as long as final demand grows and doesn’t fall into a recession.

The recent drop in the price of oil would also concern me if it was unambiguously related to weakening global economic activity. But again, the stronger dollar can explain some of the recent weakness in oil. Another important factor in the oil market is that the Saudis are doing their best to flood it in order to increase the effectiveness of sanctions imposed against Iran. The sanctions seem to be working, and yesterday’s news that the Iranians may be starting to budge on the nuclear issue helped to send the spot price of a barrel of Brent crude oil down by $3.00 to $106.21, the lowest since December 19, 2011. The nearby futures price of gasoline has dropped by 54 cents since March 26. This morning’s WSJ reports that during yesterday’s negotiations, the Iranians balked at making any concessions unless the sanctions are lifted. However, the price of oil is up only slightly this morning.

Lower gasoline prices should lift consumer confidence and spending this summer in the US. The Gallup Economic Confidence Index rose to a new high last week for the first time in the four-plus years of this poll. Rising confidence may also reflect improving labor market conditions. If so, then auto sales should continue to rebound, and home sales should finally start to recover.

The Europeans may not be quite as lucky since a weaker euro to some extent offsets the drop in oil prices. However, fuel prices are a major component of budgets and inflation rates in emerging economies. They get a direct economic boost from lower oil prices, and can provide more monetary stimulus when inflation is ebbing.

Today's Morning Briefing: More Grand Plans, Again. (1) A list for the bulls. (2) Grand Plans buy time. (3) Getting ready for a Grexit. (4) Strong dollar weakens commodity prices. (5) Why are oil prices falling? (6) US growing. (7) Sentiment is bearish, which is bullish. (8) April and May data confirm housing recovery. (9) Lots of weak indicators in Europe and China. (More for subscribers.)

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