Commodity price index smashed again

The RBA has released its commodity price index for October, which dived another 2.4% in SDR (currency weighted) terms – the key determinant of the terms-of-trade – and by 2.0% in Australian dollar terms:

Preliminary estimates for October indicate that the index decreased by 2.4 per cent (on a monthly average basis) in SDR terms, after decreasing by 2.9 per cent in September (revised). The non-rural subindex decreased in the month, while the rural and base metals subindices increased. In Australian dollar terms, the index decreased by 2.0 per cent in October.

Over the past year, the index has decreased by 4.2 per cent in SDR terms, led by lower coal, LNG and alumina prices. The index has decreased by 1.3 per cent in Australian dollar terms.

Over the October quarter, the index of commodity prices fell by 10.8% in SDR terms and by 9.0% in Australian dollar terms. Over the year, they fell by 4.2% (SDR terms) and by 1.3% (Australian dollar terms) respectively.

The six month growth rate has also turned negative:

As shown below, there is a very strong correlation between the commodity price index and the terms-of-trade (ToT):

Hence, the 7.6% quarterly slump in commodity prices over the September quarter suggests a large fall in the ToT and by extension national income when the September quarter national accounts are released early next month.

However, this view is contradicted by last week’s Import/Export price index release from the ABS, which suggested that the ToT would rise by 1.0% over the September quarter (forecast in green):

Thus, we are receiving some contradictory signals about the direction of commodity prices as it pertains to the ToT.

Leith van Onselen

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