Since early last year, commodity markets have signaled a rebound in global economic growth following the recession that rolled through the global energy industry during 2015.
While oil prices have remained strong this year, industrial commodity prices have stalled (Fig. 1).
The price of a barrel of Brent crude oil is up 127.8% from its cyclical low on January 20, 2016. The CRB raw industrials spot price index is up 25.4% from its cyclical low on November 23, 2015. This year so far through Friday’s close, the former is up 11.8%, while the latter is up only 1.2%.
Debbie and I generally give the CRB more weight as an indicator of global economic activity than we give the price of oil. That’s because the price of oil often is a function of unique supply and demand factors that don’t reflect global economic activity. These factors tend to be geopolitical in nature. In addition, while we and others have suggested that OPEC’s days are numbered, the cartel continues to have an impact on the price of oil.
Nevertheless, we continue to monitor our homebrewed YRI Global Growth Barometer, which is the average of the CRB raw industrials spot price index and the price of oil (Fig. 2). Admittedly, that gives oil equal weight, which is more weight than we reckon it deserves. Our YRI-GGB is up 49% from its low of 54.9 on January 20, 2016 to its new cyclical high of 81.8 last Thursday. That’s the highest it’s been since December 11, 2014, but still 26.0% below its June 20, 2014 high.
To cut to the chase, the YRI-GGB confirms that the global economy is rebounding.
Now let’s have a look at the details:
(1) Baltic Dry Index. The fundamental basis of the improvement in industrial commodity prices is confirmed by the uptrend in the Baltic Dry Index since early last year (Fig. 3). It is up 405% since February 11, 2016 through the end of last week. This can be a funky indicator of global trade since it is very sensitive not only to the demand for dry bulk commodities but also the supply of freighters. It soared during 2006 and 2007 when global demand for commodities, especially Chinese demand, overwhelmed the availability of freighters (Fig. 4). It crashed when the global financial crisis unfolded during 2008, and remained relatively low during the subsequent global recovery as shipyards completed a large fleet of new freighters that had been ordered during the boom.
(2) Dr. Copper. Professor Copper is widely deemed to be the commodity with a PhD in economics. It is very sensitive to global economic activity, especially in China. It may soon also become a very sensitive indicator of the global transition from motor vehicles powered by fossil fuels to those running on electricity. Electric cars require more copper because that is an essential element for producing electric motors. The CRB raw industrials includes the price of copper. However, while the CRB has stalled this year, the price of copper is up 23% ytd (Fig. 5).
Interestingly, the strength in the price of copper this year suggests that the strength in the price of oil this year might reflect rebounding economic activity, and not just OPEC’s apparently successful efforts to keep a lid on the production. The price of oil is highly correlated with the price of copper (Fig. 6).
(3) Fracking USA. Also confirming that this year’s strength in oil prices reflects better global economic activity is the fact that US oil field production rose to 9.6mbd in early November, rebounding back to its high of 2014, before the price of oil took a dive (Fig. 7). Despite all this US output, the price of oil is still rising. Furthermore, US stocks of crude oil and petroleum products dropped below last year’s readings in early July, and just dropped below 2015’s levels (Fig. 8).
(4) S&P 500 Materials & Energy. In the past, there has been a good correlation between the CRB raw industrials spot price index and the ratio of the S&P 500 Materials stock price index relative to the S&P 500 (Fig. 9). While the Materials index has outperformed the S&P 500 recently, it has been mostly a market performer (neither leading nor lagging the market) since the spring of 2016. The ratio has been fairly flat and range-bound since then despite last year’s rebound in the CRB. The ratio has been more consistent with the CRB’s stalling this year.
By the way, as Jackie explained last Thursday, much of the recent strength in the Materials sector has been related to the outperformance of Materials companies that produce lithium and stand to benefit from the greater demand for this element in the production of batteries for electric cars.
Also lagging behind the rebound in the oil price is the ratio of the S&P 500 Energy stock price index to the S&P 500 (Fig. 10). Seems that stock investors aren’t convinced that the rise in the oil price is sustainable. They might be wrong if the price is reflecting better global demand combined with recent geopolitical concerns about the stability of the Saudi regime.
(5) Global production. Global industrial production data are available through August (Fig. 11 and Fig. 12). They show that production rose to a record high with a y/y growth rate of 3.8%, following a growth dip during the second half of 2014 and all of 2015.
Interestingly, that dip was concentrated among the advanced economies, while the emerging economies barely skipped a beat (Fig. 13 and Fig. 14).
(6) Emerging markets. The performance of the Emerging Markets MSCI stock price index is showing more and more signs that emerging economies are finally emerging from their dependence on commodities. In the past, this stock price index was highly correlated with the CRB raw industrials spot price index (Fig. 15). But they’ve clearly diverged as the stock index (in local currency) has soared 27% ytd. They’ve also broken free of their correlation with the trade-weighted US dollar (Fig. 16). In the past, a strong dollar weighed on the Emerging Markets MSCI. That’s no longer the case, as the latter has soared to new record highs this year.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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