Commodity traders to seek clues from upcoming US inflation, Fed officials’ speeches next week, for timing of policy easing

By Kaynat Chainwala, senior manager – commodity research at Kotak Securities

Markets swung between gains and losses in the week ended May 10 as some FOMC officials reiterated on higher-for-longer mantra while softer economic data from the US backed the case for the Federal Reserve to start easing monetary policy this year.

Dollar fluctuated between 104.8 and 105.7 in line with mixed signals on the US economy and largely hawkish comments from Fed officials, who echoed the sentiment to keep rates high to cool inflation towards the central bank’s 2 percent target. US Initial claims increased by 22,000 in the week ended May 4 to 231,000, highest level since August, providing more evidence of a cooling labour market. Continuing claims, a proxy for the number of people receiving unemployment benefits, rose by the most in a month to 1.79 million in the week ended April 27. In response to the weak labour report, expectations of a rate cut in September gained traction, driving gains across global equities. However, an increase in short-term inflation expectations amid indications of a US economic slowdown tempered the upside potential in risky assets.

COMEX Gold jumped to three week high of $2385.3 per troy ounce and closed the week with ~3 percent gains as strengthening bets that the Federal Reserve will be able to start cutting interest rates this year weighed on US dollar and benchmark treasury yields. Silver surged around 7 percent to $29 per troy ounce, thanks to gains in both gold and industrial metals.

WTI crude approached $80 per barrel owing to lingering geopolitical tensions in the Middle East as Israel said it would continue its fight against Hamas in the Gaza Strip even without US assistance. Also, drop in US crude inventories and hike in Saudi Official Selling Price (OSP) to Asia for a third consecutive month in June were supportive.

However, US gasoline and diesel demand are at their weakest seasonal level since 2020, at the onset of the summer driving season in the US, held prices from gaining sharply. Meanwhile, increase in Chinese imports kept a lid on downside and led to a marginal weekly gain.

LME base metals mostly traded higher buoyed by reduced down payments and removal of property purchasing curbs in big Chinese cities, while Aluminium slipped more than 1 percent after record inflows at the LME warehouses. On the Daily chart, MCX Copper May futures (continuous) opened gap up and rallied sharply on Friday registering two-year high (878.75) indicating bullish bias. Price is trading above 20SMA and Supertrend (7,3) confirming bullish short-term trend. The price might keep moving higher till 886 if the closest support level of 850 is not breached on a closing basis.

Rising risks of stagflation, amid indications of a slowing US economy and persistent price pressures, complicate the Fed’s interest rate decision. Preliminary UoM (University of Michigan) Consumer sentiment unexpectedly plummeted, while one-year and five-year inflation expectations surged to 3.5 percent and 3.1 percent, respectively, the highest since November. This triggered a reassessment of rate cut expectations, with the CME FedWatch tool now indicating a 60 percent probability of a rate cut in the FOMC September meeting, down from 70 percent after the jobless claims data.

This underscores the importance of the upcoming US inflation print and Fed officials’ speeches next week, as traders seek clues on the timing of policy easing. CPI is anticipated to ease slightly to 3.4 percent in April from 3.5 percent in March, still significantly above the Fed’s comfort zone. Additionally, traders will closely monitor key indicators from China for insights into April’s economic activity, following favourable trade figures.

Release of the monthly reports from OPEC and the International Energy Agency, particularly after the Energy Information Administration (EIA) revised down their oil demand estimates for 2024, might heighten anxiety among oil market participants.

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