Commodity markets cautiously await US Core PCE numbers amid concerns over potential delay in Fed rate cuts

By Kaynat Chainwala, Senior Manager Commodity Research at Kotak Securities

This week ending May 24, renewed concerns about inflation and continued hawkish commentary from FOMC officials dampened investor sentiment, despite an unprecedented rally earlier in the week.

The dollar rebounded above 105 levels as fears of an uptick in goods inflation were fueled by a surge in input prices, as indicated by the US PMI figures. The Flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month, highest level since April 2022, but this was accompanied by a rebound in input costs.

Furthermore, a hawkish tone was echoed in the May meeting minutes, where Fed officials expressed concern over the lack of progress in its fight against inflation this year. There was a broad consensus that the FOMC does not have enough confidence to lower interest rates. The FOMC May meeting minutes showed that officials discussed the need to hold rates steady for longer or reduce them if the labor market weakens. Additionally, “various” officials also mentioned a willingness to hike rates if warranted, challenging Fed Chairman Powell’s previous remarks that a rate hike is unlikely. This weighed on rate cut expectations, leading to a pullback across global equities.

COMEX Gold slipped more than 3 percent this week, marking its biggest weekly loss since December 2023, as investors recalibrated Fed rate cut bets after a hawkish FOMC meeting minutes and better-than-expected data from the US. Silver also fell by 2 percent in line with weakness in both gold and industrial metals, but supportive supply-demand fundamentals helped the white metal close above $30 per troy ounce.

MCX Silver July Futures (continuous) mildly retraced after registering a new 52-week high at Rs 95,250 per kg. However, the price is above the strong support situated at 88,000 followed by the 20-period SMA (Simple Moving Average) on the daily chart located around Rs 86,200. The 14-period RSI (Relative Strength Index) is trading near 65, indicating bullish momentum in the counter. In the coming week, Silver may trade with a sideways to bullish bias and could continue its trajectory to test the newly formed 52-week high as long as the above mentioned supports are upheld.

WTI Crude slipped to $76.15 per barrel, lowest since mid-February, hurt by an unexpected addition in US oil stocks and rising prospects of higher interest rates in the US. However, a pickup in gasoline demand ahead of the Memorial Day weekend, which is typically seen as the start of the peak driving period, helped prices rebound to around $78 per barrel and limit the decline to 2.5 percent for the week.

Base metals closed mixed as Copper faced pressure on indications of weak demand in China, while Aluminum gained momentum fueled by supply disruption concerns. Copper began the week on a positive note, reaching an all-time high of $11,104 per tonne, building on the previous week’s rally, following China’s announcement of extensive measures to revive its struggling real estate sector. However, import premiums at historically low levels and fabricators scaling back operations in response to elevated Copper prices underscored demand challenges in China, leading to a decline to $10,210 per tonne.

Next week, US PCE prices index, revised GDP estimates, Chinese PMIs, and Eurozone CPI will be in focus. Most importantly, markets will be cautiously looking forward to US Core PCE figures as it is expected to moderate in April in line with cooler core CPI figures. Considering that swaps traders are now pricing in a quarter-point rate cut in December, compared with November a day earlier, a hotter than expected print may imply no rate cuts in 2024 and dampen market sentiments further.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.