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.
