Indiana Grain Company, LLC

Posted: 03/16/10

By: tomgrisafi

Why have commodity prices been relatively weak as of late? Paradoxically, the answer can be found in Chinese inflation.

You may have noticed something strange lately. Though the bulls have been stampeding, commodities just haven’t been getting the job done.

All the old relationships seem to be out of whack. For example, less than two weeks ago some analysts spoke of “the great decoupling,” i.e. the growing disconnect between crude oil and stocks. In recent days, stocks have been strong, while oil is cratering.

The CRB index tracks a basket of major commodities. Right now, the price action in CRB is middling at best. The 50-day exponential moving average is close to flat. What’s worse, prices are headed in the wrong direction, having failed twice to retake the average or break previous resistance.

The weak price action in commodities comes against a backdrop of renewed equity strength. Financials, banks, homebuilders all have ripped higher in recent days.

Theoretically at least, renewed optimism for the U.S. economy should be inflationary. If things are getting better for consumers and the banks, then monetary velocity should be picking up. Stagnant pools of lending dollars should be flowing again. All this should be bullish for commodities (and prices in general).

Why isn’t it? One potential reason is Chinese inflation.

China’s economy is showing signs of overheating. This, in turn, has led to concern over what the People’s Bank of China may do in response to keep inflation in check. If China taps on the brakes too hard, as the CEO of Caterpillar so memorably put it, the result could “send everyone through the windshield.”

Chinese authorities have stated with confidence that things are still under control. But this isn’t really news, because what else would they be expected to say? Evidence on the ground suggests otherwise.

“China’s accelerating inflation has started to erode household savings,” Bloomberg reports, “threatening to spur purchases of property and stocks and fuel asset-price pressures.”

Source: Bloomberg, Tiapan Daily

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