By Moming Zhou, MarketWatch
Last update: 6:59 p.m. EST Feb. 8, 2008
SAN FRANCISCO (MarketWatch) -- A benchmark for a range of commodities hit a record high on Friday, a reminder to the Federal Reserve that inflation risks loom even as it concentrates on reviving U.S. economic growth by slashing interest rates.
Commodities including crude oil, gold and wheat rallied across the board, pushing the Reuters/Jefferies CRB Index, a benchmark barometer gauging the prices of major commodities, to an historic high. Crude oil made its biggest one-day gain in nearly four months, wheat futures hit a record and sugar futures spiked more than 6%.
The gains, which appeared largely driven by factors affecting supplies in the individual markets, illustrated the commodities sector still has its flair for besting other asset classes. The Dow Jones Industrial Average ($INDU
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$INDU) on Friday slid 64.9 points to 12,182.1 as concerns about a credit contraction kept a gloom over equities. See Market Snapshot.
The rally caught the attention of Fed watchers, who noted that persistent inflation in commodities will test the Fed's determination to keep cutting rates.
"The surge in commodities prices serves as a reminder of the persistence of inflation, which has not abated much despite the deep economic slowdown in the U.S., and the difficulties the Fed would have in cutting rates as low as it did in 2003 when the funds rate reached 1%," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., in emailed comments.
The Fed has cut the fed funds rate by 2.25% since September, and investors are expecting more rate cuts in the following months.
After trading below $90 a barrel for three days, crude-oil futures surged more than 4% on Friday to approach $92 a barrel. Friday's rise of nearly $4 is the biggest daily gain the front-month crude contract has seen since October.
Crude had been under pressure on concerns that the economy of the United States, the largest oil consumer, is falling into recession. Friday's abrupt surge was triggered by a talk of a production cut from the Organization of Petroleum Exporting Countries and output disruptions in North Sea and Africa, two major producing areas after the Middle East.
Futures of other energy commodities, including natural gas, heating oil and coal, also soared. See Futures Movers.
On the metals side, gold and other precious metals reaped steep gains Friday, with April gold futures surging more than $10 to close at $922.30 an ounce. See Metals Stocks.
The day's bonanza also spread to food and grains.
Wheat futures, a benchmark grain, surged to a record on three U.S. futures exchanges on concerns that supplies of spring grain will not be able to meet demand.
Wheat futures for March delivery gained 20 cents, or nearly 2%, to close at a record high of $10.93 a bushel on the Chicago Board of Trade.
An explosion and fire at a sugar refinery in Georgia late Thursday pushed a benchmark sugar-futures contract to its highest level in more than three weeks Friday.
Sugar futures for March delivery gained 0.73 cent, or 6.1%, to 12.71 cents a pound on ICE Futures U.S., formerly the New York Board of Trade. The front-month futures contract hasn't seen such a high since Jan. 17. See full story.
A common driving force behind commodities' universal rally is the falling value of the dollar against other major currencies, said Darin Newsom, senior analyst at DTN, a commodities information provider in Omaha.
"All these commodities seem to be trading in tandem more these days; one of the reasons is the dollar," said Newsom. Since most commodities are dollar-denominated, their prices tend to move up as the dollar edges lower. A weaker greenback makes dollar-denominated commodities cheaper to buyers holding other currencies. Those buyers are more willing to bid up prices.
The dollar index, which tracks the value of the greenback against a basket of other major currencies, has remained low as the Fed cut short-term rates in the last year. Rate cuts lower the value of dollar-denominated assets and weaken the dollar. The dollar slid against its major rivals Friday. See Currencies.
The sliding dollar and rallying commodities prices are keeping Fed policymakers in a tricky situation when they meet next month to consider another rate cut.
U.S consumer prices rose at a 5.6% annual rate in the final three months of 2007, a pace that spooks many economists, with energy prices jumping at a 37% annual rate, the Labor Department reported last month. Even the core rate, which excludes food and energy, increased at a 2.7% annual rate during the December quarter. See Economic Report.
Still, investors are expecting more rate cuts from the Fed, which has said that inflationary risks remain a concern, but that those worries pale in comparison with risks that the economy could sink into a recession.
The market is priced for 100% odds of a 50 basis-point cut occurring at the Fed's March 18 meeting and for 32% odds of a 75 basis-point cut, up from Thursday's 24%, according to Miller Tabak's Crescenzi.
For the April 30 meeting, the market is priced for 100% odds of a cumulative 50 basis points in cuts and 94% odds of 75 basis points in cuts, up from Thursday's 90%.
Moming Zhou is a MarketWatch reporter, based in San Francisco.