Leading indicators are signalling a slowdown in emerging-world growth, confirming an earlier analysis based on monetary trends – see post in November. The loss of momentum is likely to be associated with a stabilisation or reversal in industrial commodity prices – unless the Federal Reserve embarks on "QE3".

Emerging-world growth has been a key driver of commodity price movements in recent years. The first chart shows the strong positive correlation between six-month changes in E7 industrial output and the Journal of Commerce industrial commodity price index. (The E7 refers here to the BRIC economies plus Korea, Mexico and Taiwan. The JoC index tracks 18 materials used in manufacturing production including crude oil and natural gas.)

The six-month change in the JoC index rose from a low of -2% in October to 23% in February, mirroring an increase in six-month industrial output expansion from 2.2% (not annualised) in September to 6.1% in January (the latest available month).

Industrial output growth, however, is likely to have peaked in February. The second chart shows the relationship with a conventional leading index (based on the OECD indices for six of the E7 countries and a national index for Taiwan) and a proprietary "leading indicator of the leading index". The latter is more useful, signalling turning points in six-month output expansion an average of four months in advance.

This "double-lead" indicator peaked in October and has fallen for three successive months, suggesting that industrial output momentum will decline from a high in February at least through May. The slowdown, in fact, is likely to extend well into the second half, based on a continued deceleration of real narrow money M1 – third chart.

A set-back in commodity prices would reverse a recent drag on G7 real incomes, supporting domestic demand. As previously discussed, however, monetary trends also suggest a G7 slowdown from this spring, as a loss of momentum in Euroland offsets continued US strength.