Falling Global Demand Pressure Commodity Prices To The Downside

• Falling global demand in the past year has been pressuring commodity prices to the downside as recession fears have been growing globally, particularly in Europe.
• For instance, the chart below shows that China imports, which has historically been used as one of the key inputs when computing a global leading economic indicator, have strongly co-moved with commodity prices (CRB CMDT index) in the past two decades, and have been pricing in cheaper commodities since the start of the year.
• The fall in China imports (also seen as a good proxy of global demand) have been mainly driven by the sharp slowdown in the domestic economic activity due to zero-Covid policy and the sharp liquidity contractions in 2021.

• With economic data deteriorating sharply in the past two months in the major economies, investors have questioned if commodities could continue to fall in the near term as demand should continue to deteriorate.
• The chart below shows that G10 economic surprises have historically strongly led China imports by 6 months.
  • Note that we limited the range of the G10 economic surprise index to -100 / +100 following the Covid shock.

Source: Bloomberg/MNI