| Week ending March 30, 2018 |
Uncertainty depresses commodity prices
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Policy developments contributed to market developments last week
Commodities saw a turbulent week, with higher US interest rates and trade actions by the Trump administration roiling markets, while fundamentals continue to point to softer prices. The IHS Markit Materials Price Index (MPI) fell 1.0% last week, its seventh retreat in the last eight weeks. The decline was broad-based, with 8 of the MPI’s 10 sub-indexes falling, while a 9th stayed flat. Chemicals showed the largest decline, dropping 3.6%, as ample supply continues to depress prices.
Ethylene prices fell strongly for the second straight week, falling 9.1%, as the market continues to deal with oversupply from new capacity. Their drop was the main driver behind the declining chemical price index. On the demand side of the market, underwhelming polyethylene production prevented a drawdown in high supply levels. Ethylene highlights that although volatility is creating weakness in the commodity complex, fundamentals are also part of the reason prices are retreating.
Last week’s interest rate hike by the US Federal Reserve (Fed) was widely anticipated and, for the most part, already priced into equity, bond, and commodity markets. What caught markets off-guard was the release of the Fed’s latest US forecast and the minutes from the latest Federal Open Market Committee (FOMC) meeting. Together they indicated that interest rates not only may be lifted more quickly, but also to a higher level than previously expected. On trade, the Trump administration’s announcement of additional tariffs on Chinese imports under section 301 of the 1974 Trade Act heightened worries about possible reprisals and a full-blown trade war. The bottom line, however, is that actions by the Fed and the administration last week raised uncertainty about the near-term outlook and thereby contributed to volatility, with much of the optimism that markets opened the year with dissipating.
ANNOUNCEMENT:
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Construction Labor Costs Reach Highest Level in Almost Three Years, IHS Markit Says
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Construction costs rose again in November, according to IHS Markit and the Procurement Executives Group (PEG). |
The current headline IHS Markit PEG Engineering and Construction Cost Index registered 60.2, supported by strong figures in both the materials/equipment and labor sub-indexes. The materials/equipment price index was 60.9 in November, moving up from the October figure of 58.9. Price increases were widespread. Current subcontractor labor prices rose at a fast pace in November: the index figure came in at 58.5, the highest reading since December 2014. “Subcontractor rates continued to accelerate over November and expectations for future increases reached a five-year high,” said Emily Crowley, principal economist - pricing and purchasing, IHS Markit. “Tightening labor market conditions combined with an uptick in activity are driving expectations of future rate increases. Currently the U.S. South and West are having the most trouble finding workers leading to stronger wage escalation, whereas the end of major projects in Eastern Canada are keeping pressure off of wages in that region.”
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