Blog - Investing Notes
June 20, 2008 - Effects of Macroeconomic News on Commodity Futures
Do commodity futures prices react systematically to news about the overall
U.S. economy? If so, how might investors/traders exploit the reactions? In their
March 2008 working paper entitled "How
Do Commodity Futures Respond to Macroeconomic News?", Dieter Hess, He Huang
and Alexandra Niessen investigate the impact of surprises in 17 U.S. macroeconomic
indicators on two broad commodity futures indexes: (1) the equally-weighted
CRB
Index, and (2) the production-weighted S&P
GSCI Commodity Index. Using macroeconomic news reports (surprise components),
contemporaneous daily commodity index prices and various measures of the economic
cycle over the period 1989 to 2005, they conclude that:
- Across the full business cycle, commodity futures indexes do not significantly
react to surprises in macroeconomic indicators.
- However, the effect of macroeconomic news on commodity futures differs between
economic contractions (recessions) and expansions, as follows:
- During contractions, commodity futures prices relate
positively to surprises in inflation and real activity (durable goods
orders, the Institute for Supply Management indexes and unemployment rate).
- Commodity indexes do not significantly react to surprises
in macroeconomic indicators during economic expansions, except: both relate
positively to surprises in the Consumer Price Index (CPI), and the GSCI
Commodity Index relates positively to surprises in Gross Domestic Product
(GDP).
- For comparison, 10-year Treasury note yields (prices) relate positively
(negatively) to surprises in inflation, and S&P 500 returns relate negatively
to news about a higher CPI and a higher Producer Price Index and positively
to news about surprises in industrial production and GDP.
- Findings are robust to alternative definitions of economic expansions and
contractions.
- Investors/traders can exploit the behavior of commodity futures indexes
especially as protection against bad economic news during recessions.
In summary, the reactions of aggregated commodity futures prices to surprises
in macroeconomic indicators (up and down with inflation and real activity) are
most reliable during recessions.
For related research, see Blog
Synthesis: Investing/Trading in Commodities and Commodity Futures.
