Commodity markets to focus on US CPI, retail sales data next week; metals may remain subdued given holiday in China

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

The financial markets witnessed a week of fluctuations, influenced by changing expectations regarding the Federal Reserve’s actions, concerning economic indicators from China, and escalating geopolitical tensions in the Middle East. The dynamics were shaped by comments from Federal Open Market Committee (FOMC) officials and robust US economic data, prompting a reassessment of expectations for Federal Reserve rate cuts.

Federal Reserve Chairman Jerome Powell stated that recent developments had not altered the Fed’s base-case scenario, which includes a 75 basis-point cut to the federal fund in 2024. Several FOMC officials echoed similar sentiments, emphasizing the absence of an urgent case for lowering interest rates. Despite this, US equities reached new milestones, with the S&P 500 surpassing the 5000 mark for the first time, and the Nasdaq reaching a one-year high. This surge was attributed to renewed investor confidence, driven by strong earnings reports and data highlighting the resilience of the US economy.

COMEX Gold prices started the week on a negative note following robust US jobs data and hawkish comments from Powell, signalling that rate cuts in March are unlikely. Concerns about the health of US regional banks, particularly their exposure to Commercial Real Estate (CRE) loans, came into focus after Moody’s downgraded NYCB to junk status due to significant losses tied to its CRE loans. Treasury Secretary Janet Yellen acknowledged concerns about CRE losses but assured that regulators are working to ensure adequate loan-loss reserves and liquidity levels in the financial system.

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Investment activity remained weak with persistent ETF outflows. However, gold managed to avert a significant decline as US debt sales received a warm reception from investors. On the price action front COMEX Silver has formed a bullish engulf candlestick pattern indicating a positive momentum in the upcoming week. The pattern might be negated only if it moves below the pattern low of $22.19 per troy ounce

Geopolitical tensions escalated as Israel rejected ceasefire talks, impacting global markets. In the commodities market, WTI Crude prices saw a reversal from earlier losses, surpassing $77 a barrel, triggered by Houthi attacks on two ships in the southern Red Sea and the US’s commitment to more strikes against Iranian forces and proxies in the region. The situation in the Middle East overshadowed hopes of a ceasefire between Israel and Hamas, leading to a rise in crude prices.

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LME base metals faced challenges amid persistent deflation pressures in China and a regional increase in inventories ahead of China’s Lunar New Year holiday. China’s consumer prices experienced a 0.8 percent decline, the fastest since the global financial crisis, while the Producer Price Index (PPI) remained stuck in deflation for 16 consecutive months, reflecting China’s struggle to revive domestic demand and consumer confidence. Despite efforts such as liquidity boosts by the People’s Bank of China (PBoC), investors remained skeptical about the effectiveness of Beijing’s support measures.

Looking ahead, the focus for the upcoming week will be on US Consumer Price Index (CPI) and retail sales. Bloomberg forecasts suggest a slight easing of headline CPI to 2.9 percent in January compared to 3.4 percent in December, and a similar easing for core CPI to 3.7 percent in January compared to 3.9 percent in December.

The expectation of cooling inflation, coupled with geopolitical risk premiums, may provide support for gold prices in the coming week. Additionally, with Chinese markets closed for the Lunar New Year holiday, movements in metals are expected to remain subdued during this period.

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