Commodities are the Big News in a Quiet Week

It was a quiet week overall. Most investment markets didn’t move a lot. The economic data was consistent with expectations.

The politicians have been wrapped up in their conventions this week and much of the major media joined them. For investors, the big news in my opinion has been in commodities.

After a substantial rise this year from historic lows, commodities tumbled this week. The decline was led by energy commodities, especially oil.

The rise in energy commodities earlier in the year was due to several factors. Demand grew because the economy was doing well. Production had been slashed because of the price declines, so supply was reduced. There also were supply disruptions from Nigeria (due to political unrest) and Canada (due to wildfires).

The recent decline in oil prices had its origins in decisions made last winter. The winter was mild in much of the United States, so refiners reduced planned production of heating oil and increased gasoline production above usual winter levels. Now, there is too much gasoline on the market. The supply simply exceeds demand.

The oversupply has several effects. Of course, prices at the pump are down. Also, the price of crude oil is falling. Refiners are reducing their production, and that’s hurting their profit margins. Oil producers reportedly are putting more crude into storage, since the refiners are buying less. The oversupply and its effects are likely to continue into the fall.

The oversupply of oil and gas could affect other investments. U.S. stocks have moved up and down with oil the last few years, though that hasn’t been the historic pattern. A fresh decline in oil prices also could reduce inflationary expectations and revive deflationary expectations. That situation would reduce interest rates and boost bond prices.

But this is likely a short-term price decline. So, it might not affect other investments, especially stocks, as much as in the last few years. Also, absent other unusual events, the markets should be back in balance late in the fall or early in the winter. Oil prices should increase then.

The Data

The PMI Manufacturing Index Flash report for mid-July was one of the recent positive reports on manufacturing. The index rose sharply to 52.9, its highest readingin nine months. Several components of the report were strong, but a surge in new orders was the major factor in the move.

Even the Dallas Fed Manufacturing Survey improved. The headline number still was negative 1.3. But that’s a substantial improvement from the double-digit negative readings we’ve seen most of the last two years, including negative 18.3 last month.

The Richmond Fed also reported a solid increase in its Manufacturing Index. The measure reached positive 10 in the latest month, compared to a revised negative 10 the previous month. Again, a surge in new orders was a major factor in the change.

The Kansas City Fed Manufacturing Index, on the other hand, reported a negative 6 after delivering a positive 2 last month. The Kansas City Fed’s region has been hard hit by the decline in energy prices. Last month’s index was the only positive reading in about 18 months.

Durable Goods Orders paint a mixed picture. The headline number was negative 4%, following a revised 2.8% for the previous month. But when the volatile transportation sector, which declined 60% for the month, is excluded, the dip is only 0.5%. Perhaps more importantly, core capital goods increased 0.2%. This category is basic business equipment. A positive number indicates businesses are optimistic enough to invest in expansion.

Housing reported mildly positive data overall. The S&P Case-Shiller Home Price Index reported a 0.1% decline in home prices on average, and last month’s report was revised from a positive 0.5% increase to a 0.2% decrease. Over 12 months, prices increased 5.2%. This is consistent with the FHFA House Price Index, which showed barely positive price increases. (Last week, index co-developer Karl Case passed away.)

The Pending Home Sales Index indicated sales of existing homes increased 0.2%, but last month’s index was revised from negative 3.7% to positive 1.3%.

New Home Sales, stronger than existing home sales, surged to a 592,000 annualized rate to mark the highest monthly rate in the ongoing recovery. The gain was accompanied by a 6.2% increase in the median sale price. But the 12-month median price increase is 6.1%, indicating most of the price strength is recent. There’s scant inventory of new homes for sale, which limits monthly sales and also might explain recent price increases.

Consumer Confidence, as measured by The Conference Board, is holding at 97.3, which is considered a strong reading but still is a bit below the highs of 2015.

The services sector is holding steady, according to the PMI Services Flash index. The index is 50.9, down slightly from last month’s 51.3, indicating the services sector is expanding, though barely. This measure has been weaker than some other measures of the service sector.

New unemployment claims increased 14,000 for the week. The four-week average still declined by 1,000 because of low claims in recent weeks. The number remains very low and indicates the labor market still is reasonably strong.

The Markets

The global stock rally continued, with emerging market stocks again leading the way. Most other investment assets lost value.

Emerging market stocks rose 0.53% for the week ended with Wednesday’s close. The All-Country World Index gained 0.07%. The S&P 500 lost 0.26%. The Dow Jones Industrial Average lost 0.65%. The Russell 2000 led the major indexes with a 0.88% increase.

Long-term bonds gained 1.71% for the week. Investment-grade bonds gained 0.32%. Treasury Inflation-Protected Securities (TIPS) rose 0.30%. High-yield bonds followed stocks more than bonds, as usual, losing 0.26%.

The dollar lost 0.40%.

Energy-based commodities lost 4.11%. Broad-based commodities lost 2.09%. Gold gained 2.13%.

Bob’s News & Updates

Last week, I was presented with a plaque containing a resolution from the Fairfax County Board of Supervisors. The resolution recognizes my long-term service to the retirement system and noted its outstanding investment results over the last few decades. I’ve always been happy to contribute to my community. I bring insights from my work on Retirement Watch to the retirement system, and I bring ideas from the retirement system and the best institutional investors to my work for you.

Positive reviews continue to be posted on Amazon.com for the revised edition of my book, “The New Rules of Retirement.” Most of the reviews give the book five stars, but two give four stars (tough graders!). As one of the reviews says, “This is the best of the very many I have reviewed. A must read if you are considering the future, or near retirement.” Order your copy today.

There’s still time to make your free registration for the MoneyShow San Francisco. Join me, several of my colleagues at Eagle Financial Publications and a number of other financial experts. We’ll be at the Marriott Marquis from August 23-25. Free registration is available by calling 800-970-4355 (please mention priority code 041205) or go online to RobertCarlson.SanFranciscoMoneyShow.com.

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I comment and link to these and other items on my public blog at http://www.bobcarlson.net.