As bad as it’s been in the equity markets lately, it’s been just brutal in the commodity pits. The Dow Jones/UBS Commodity Index is off -14% this month, while the S&P 500 is down -5%. Certain individual commodities like copper, gold, silver, etc. have been bludgeoned in recent days. Earlier this year, commodity prices were soaring — gas prices touched $4/gallon back in May. That spike is still filtering through official inflation numbers, with the CPI reaching a post-recession high of 3.8% in August.
It seems that the Fed’s QE2 program launched late last year was successful only in squeezing consumers by bringing back some inflation. Gains in asset markets have largely vanished, and economic growth was hugely disappointing in the first half of this year. But the inflationary side effects linger. Now, with QE2 out of the way and investors unimpressed with the Fed’s latest scheme to extend the maturity of its portfolio, commodities are undergoing a major re-adjustment lower. The bad news is that we view the commodity rout as reflective of a weakening global economic backdrop, and we don’t think it’s fully run its course. But the silver lining is that it should help sow the seeds for an eventual turnaround by providing some relief for consumers.
|Chart: iPath DJ/UBS Commodity Index ETN|