Commodity markets set to focus on US retail sales, FOMC officials speeches next week

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

Global markets experienced fluctuations in risk sentiment while closely monitoring inflation reports from both the United States and China, amid escalating geopolitical tensions in the Middle East.

The US Dollar Index displayed volatility, teetering between gains and losses as market participants eagerly awaited signs of a potential moderation in US inflation, which could bolster expectations for an early Federal Reserve rate cut. However, US inflation figures surpassed expectations, leading to an immediate upturn in both the dollar and US 10-year treasury yields, surpassing 102.7 and 4 percent, respectively. On a 12-month basis, US CPI and Core CPI registered increases of 3.4 percent and 3.9 percent, exceeding estimates of 3.2 percent and 3.8 percent. Despite strong inflation figures, rate cut expectations remained largely unchanged, causing the dollar to retreat below 102.2 after an initial optimistic reaction.

COMEX Gold prices rebounded sharply from a low of $2017 per troy ounce following the US inflation release. Despite initial volatility, gold prices ended the week flat due to a cooler-than-expected producer inflation print in the US, fostering speculation of earlier monetary easing by the Fed.

Unexpectedly, US producer prices declined 0.1 percent month-over-month in December 2023, contrary to market projections of a 0.1 percent rise. The yearly increase of 1 percent fell short of the anticipated 1.3 percent growth. This data contradicted previous robust CPI results, instilling hope for a gradual convergence of inflation towards the Federal Reserve’s target. The ongoing Middle East conflict continued to drive safe-haven demand for gold, with silver also recovering, leading to marginal losses of around 0.10 percent by the end of the week.

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WTI Crude experienced a significant rebound from $70.13 a barrel to $75.25 a barrel, settling 1 percent higher near $72.68 a barrel. Strikes against Houthi targets in Yemen, in response to attacks on ships in the Red Sea, reintroduced war risk premium. Concerns about a broader conflict in the Middle East and potential direct involvement by Iran posed threats to output and flows in a region responsible for a third of the world’s crude production. Crude oil prices may remain supported amid fears of disruptions and the need for vessels to divert, especially as Saudi Arabia warned that recent actions by the US and its allies could inflame tensions.

Most base metals on the LME hit one-month lows due to concerns about global manufacturing and construction activity, coupled with uncertainty surrounding the Fed’s interest rate outlook. Additionally, the World Bank’s forecast of a third consecutive year of a global growth slowdown in 2024, along with a projection of China’s economic growth slowing to 4.5 percent, added to market anxieties. This slowdown is attributed to issues in China’s troubled property sector and falling consumer prices, reflecting reluctance to spend money.

Looking ahead, markets are set to focus on upcoming US retail sales data and speeches by FOMC officials in the upcoming week, as the interest rate outlook remains uncertain following the latest US data. A robust performance in December’s retail sales could prompt the Fed to adopt a cautious approach, potentially reducing the urgency for rate cuts.

Moreover, a third consecutive monthly decline in China’s CPI in December raises expectations of the People’s Bank of China cutting rates on its one-year policy loans for the first time since August. There is also speculation about a reduction in the required reserve amount for banks. The hint of deflation suggests weak domestic demand, potentially increasing calls for stimulus, especially with key GDP and other data releases from China on the horizon.

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