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May 4, 2017 - Weekly Pricing Pulse
The IHS Materials Price Index (MPI) dropped 1.1% last week, marking its seventh decline in the past 10 weeks. Since hitting a high in mid-February the MPI has now fallen 10.3%. Although some of the anxiety in commodity markets has receded since the first-round election in France and the release of the Trump administration's outline for tax cuts, the optimism of the fourth quarter has not returned.
Oil led the MPI lower last week, dropping 4.0%, even though it is now widely expected that OPEC will extend its production agreement. Related to the softness in oil, chemical prices also declined by 2.2%. Additionally, lumber prices continued to experience some giveback after the record price increases earlier this month, falling 1.5%. Rubber prices showed strength last week, increasing by 4.0%.
Data releases last week remained mixed. US real GDP grew by an annualized rate of only 0.7% in the first quarter, the weakest in three years, although some of the softness was tied to residual seasonality. German retail sales held up nicely in March, however, once the timing of Easter is taken into account. In contrast, Chinese industrial profit growth slowed in March while mortgage rates moved higher in April. Further credit tightening in China represents a headwind for both industry and real estate markets as 2017 progresses. Likewise, higher US interest rates present a challenge for commodities as fixed-yield asset classes become more attractive. While an improving global outlook means the MPI's current correction will soon have run its course, tighter monetary policies in these two key economies suggests support for prices rather than real pressure going forward.