Commodity investors to closely watch US, China inflation that could shape expectations for monetary policy

By Ravindra V Rao, CMT, VP-Head Commodity Research at Kotak Securities

The opening week of 2024 has seen a notable transformation in market sentiment as investors grapple with evolving expectations surrounding aggressive monetary easing. The initial enthusiasm, marked by a risk-on atmosphere, has given way to a more cautious stance, prompting a reconsideration of positions across diverse asset classes.

The Dollar Index and treasury yields exhibited a robust start to the year. The greenback approached the 103 level, and 10-year treasury yields exceeded 4 percent. The impetus behind this upward trajectory was a re-evaluation of forecasts for the Federal Reserve’s 2024 rate cuts.

The December FOMC meeting minutes revealed a consensus among policymakers to maintain a restrictive stance “for some time” until inflation showed sustained downward movement. While markets had been anticipating six rate cuts in 2024, starting with a quarter-point reduction in March, the latest data has led to a reassessment. Currently, the market sees only a 62 percent chance of a 25-bps cut from the US central bank in March, down from nearly 90 percent previously.

Mixed economic data added to the uncertainty. JOLTs job openings in the US declined to 8.79 million in November, the lowest since March 2021, and the ISM PMI survey for December indicated continued contraction in US factory activity. However, non-farm payrolls, weekly jobless claims, and ADP employment data suggested ongoing strength in the US labour market, mitigating the urgency for accelerated rate cuts by the Fed.

In the precious metals sector, COMEX Gold initially greeted the new year on a positive note, hovering around $2100 per troy ounce. Geopolitical tensions in the Middle East and the expectation of Federal Reserve rate cuts in March fuelled this surge. However, a reality check ensued after the release of FOMC minutes, leading to a retracement in both gold and silver prices, moving below $2040 per troy ounce and $23 per troy ounce, respectively.

Heightened geopolitical tensions in the Middle East and the potential for a prolonged conflict in Gaza buoyed safe-haven demand for gold, preventing a more significant downturn. The current price action for COMEX gold revolves around a resistance zone near $2085-2090 per troy ounce, and the market awaits further cues from mixed US economic data.

LME base metals faced selling pressure due to sluggish manufacturing activity in China and other developed markets, impacting demand outlook. Concerns about a fragile economic recovery in China, marked by a prolonged housing slump, a lack of strong stimulus, and regulatory uncertainties, weighed on prices. LME Copper slid lower, approaching $8400 per tonne, influenced by signs of weak Chinese import demand. Meanwhile, Aluminium retraced 5 percent, erasing gains from the previous week, as traders deemed the rally triggered by concerns of supply tightness post-explosion in Guinea as overdone.

WTI Crude oil prices recorded a weekly gain of over 2.5 percent, driven by supply disruptions in Libya and heightened tensions in the Middle East, despite signs of weakening US demand. Despite EIA data revealing a continuous rise in crude stocks at the Cushing, Oklahoma hub for the 11th consecutive week, the national inventories in the US fell by 5.503 million barrels, contributing to the overall positive sentiment in crude oil markets.

Looking ahead, investors will closely watch US and China inflation figures in the coming week, as they could shape expectations for monetary policy. Hopes for Chinese authorities to ease borrowing costs in 2024 have increased, especially after the People’s Bank of China weakened the domestic currency fixing by the most in over six months. The feeble economic recovery in China is putting pressure on the nation to consider interest rate cuts and provide ample liquidity.

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