Commodity carnage will give Fed reason to pause

The prices in basic metals and energy have been plunging over the last week. The basic materials for manufacturing products such as iron ore, lumber, tin and aluminum are cratering on reduced demand from China and other Asian countries.

This implies a further global slowdown and very little opportunity for inflation to enter into the equation. In this scenario price deflation is the rule as consumers put off large purchases as prices fall week over week on household appliances, furniture and automobiles.

Into this fray, the Federal Reserve wishes to raise rates. The opportunity for further price dislocation on perceived dollar strength after a rate rise will only exasperate these deflationary forces.

These are the forces that has forced IMF chief Christine Lagarde to say publicly that the Fed should not be raising rates at this time.

I am still standing by my January prediction that there will be no rate rise this year. I feel the Fed will come out next week and say rates will remain at zero and Yellen will have to say at the press conference that global pricing pressures gave the Fed governors a reason to pause until more information is gathered before raising rates.

The middle of December with its lack of liquidity while Wall St. is in the midst of window dressing its trading books is the worst time of the year to give stocks a jolt.

 

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