Weighing The Week Ahead: What Is The Message From Falling Commodity Prices? -

Weighing The Week Ahead: What Is The Message From Falling Commodity Prices?

Nov 15, 2015Jeremy ParkinsonFinance0

Attention quickly shifted from the perceived strength in the monthly employment report to the stock market decline. While some blamed this on the expectation of higher interest rates, there was also plenty of focus on the commodity markets. I expect this interest to continue in the week ahead. The punditry will be asking:

What is the message from falling commodity prices?

Prior Theme Recap

In my last WTWA I predicted that the market story would focus on the effects of higher interest rates – widely expected after the strong employment report. This guess looked good at the start of the week, but gradually the premise eroded. By week’s end the payroll data looked more like a one-off, so the interest rate effects reversed. To get the full story, let us look at Doug Short’s weekly chart. Doug’s full post shows the various relevant moving averages in a very negative week for stocks. (With the ever-increasing effects from foreign markets, you should also add Doug’s weekly chart to your reading list).

Doug’s update also provides multi-year context. See his weekly chart for more excellent charts and analysis.

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

This Week’s Theme

The economic calendar is again modest and earnings season is winding down. Just as quickly as the consensus built for a Fed rate hike, the market mood shifted again. The combination of dollar strength and falling oil prices reawakened fears of deflation and global economic weakness.

I expect this topic to seize attention, with people asking:

What is the message from falling commodity prices?

And also – Will the Fed be watching?

There are two basic viewpoints on the commodity question.

Some prefer commodities as an economic indicator. The prices are not revised, not surveys, and not created by the government. Short-term trading has been linked to oil prices for months. The parade of pundits cites lower oil prices as a sign of global economic weakness. Some recession models (like the ECRI’s) prominently include commodity prices.

Some emphasize traditional economic data, often using a variety of indicators.

There is an argument for each approach, somewhat dependent upon one’s time frame. Often the proponents of each viewpoint do not acknowledge any legitimacy for the other. Expect to see both arguments well represented in the week ahead.

As always, I have my own ideas, reported in today’s conclusion. But first, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.

It is better than expectations.

The Good

There was a little good news.

More dovish commentary from ECB head Draghi. (FT)

Inventories beat expectations. This means an upward adjustment in the soft Q3 GDP number.

Las Vegas visitor traffic is hitting a new record, sparked by the return of convention business. (Calculated Risk)

Bullish sentiment declined. Bespoke notes how rapid the change has been, illustrating with their great charts. Here is one.

Retail sales ex-auto beat expectations 0.4% versus 0.2%. If one accounts for lower gasoline prices, the story is even better. Consumption is higher but the reported sales are lower.Bespoke notesDiane Swonk)

Michigan sentiment was strong. Doug Short’s chart shows how the reported 93.1 ranks historically. His full post provides additional charts and details.

The Bad

Some of the economic data missed expectations. Feel free to add other suggestions in the comments.

Retail sales disappointed. This was partly the result of the prior month surge in auto sales, maintained but not showing more growth. (See core sales above). The results were underscored by earnings reports from some well-known retailers, including Macy’s, Nordstrom, and Fossil. Each of these stocks took a double-digit hit.

Initial jobless claims moved higher. The level of 276K is still low by historic standards, but the widely followed four-week moving average is now edging higher.