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September 02, 2016 - Weekly Pricing Pulse
The rise in commodity prices has momentum that will begin to create pressure in supply chains as the year ends.
The IHS Materials Price Index (MPI) recorded its fourth consecutive increase last week, with the headline figure gaining yet another 2.4%. This latest increase comes at the tail end of summer—ahead of further expected strength in the index as we move into September. The latest increase was propelled by chemicals, which saw a large 8.3% jump. The oil subindex increased more modestly (up 0.6%), while metals sent through mixed signals. We also saw some momentum in the freight subindex, which moved up 2.2% and is now up by more than 50% since early February.
Incoming data last week were encouraging, with the Markit Flash Purchasing Managers' Index (PMI) reports generally coming through positively. The Eurozone August flash composite was 53.3 versus 52.2 in July, indicating increasing overall growth. The United States saw slightly weaker numbers although activity is still expanding—the services index pulled back to 50.9 from 51.4 in July, while the manufacturing flash index registered 52.1, also slightly lower than in July but still firmly in expansion territory. Like the Eurozone report, the Japanese flash manufacturing index also saw an improvement, moving to 49.6 in August from 49.3 in July, though the sector still appears to be contracting (albeit at a slower pace).
Recent strength in the MPI ties in with a better near-term outlook. Looking immediately ahead, commodity markets are expected to carry some momentum into the fourth quarter and early 2017. Stable growth and ongoing supply-side adjustments are projected to push the MPI up another 4% through the first quarter of 2017. Our one caution is an assumed US interest rate increase for December. Higher US interest rates will be supportive of the dollar and help create volatility in commodity markets at the end of the year. The chemicals sector also poses some near-term risk to the outlook, especially if natural gas prices correct sharply amid cooler autumn temperatures.