After dealing with softer Chinese data and Brexit worries in early December, developments in the US took center stage last week. An interest rate hike by the US Federal Reserve, a shuffling in the cabinet, rumors that Federal Reserve Chairman Jerome Powell may get fired, and a government shutdown were more than enough to spook markets already jittery about 2019. Commodity prices, as measured by our Material Price Index (MPI), did not escape the general volatility in markets, and fell another 0.5%. The MPI has now declined for 11 consecutive weeks and for 13 of 14 weeks since mid-September. The multi-month slide has pushed the index 13% lower, year-over-year.

Oil prices retreated 6.1% last week, marking the tenth weekly decline in the last 11 weeks as market participants continue to worry about excess supply. Apart from oil, commodity price changes were milder last week, with the non-energy MPI recording an increase for the first time since early November. Chemical prices, which have experienced downward pressure from oil prices, increased 0.5% following eight straight weekly declines. Other MPI sub-components recording increases included rubber, up 4.3%, lumber, which increased 3.5%, and freight rates, which rose 3.6%.

Tightening credit markets, slowing profit growth, political turmoil and a herd mentality in markets have proven a volatile mix for commodities in the fourth quarter. As downbeat as markets have become in December, however, some perspective is in order. First commodity markets are inherently volatile. Indeed, the current fourth quarter correction, at 15.6%, is still milder than the 18.6% correction the MPI recorded during the second quarter of 2017. Second, price declines have slowed over the past two weeks, suggesting that the current sell-off is losing momentum. Finally, fundamentals still do not show the kind of weakness that would produce a sustained drop in commodities prices as was witnessed most recently in 2015. To be sure, we do not see a resumption of the commodity price rally that characterized 2016 and 2017, although, we do expect commodity markets to find their footing with the New Year with prices stabilizing.

This post was coauthored by Thomas McCartin, a pricing and purchasing analyst at IHS Markit

Posted 27 December 2018 by Mr. William May, Senior Economist Pricing and Purchasing