FOMC policy and US labour data to test commodity investors’ nerves next week

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

Elevated price pressures in the United States dampened commodity market sentiment in the week ended April 26, but easing tensions between Israel and Iran provided some relief to risky assets.

Mixed economic data from the US pushed the dollar to a two-week low of 105.4. The slowest growth since Q2 2022, coupled with elevated price pressures in the first quarter, clouded the Fed’s policy outlook. However, brisk growth of 3.7 percent in the core PCE price index reinforced the notion that high interest rates are likely to persist for now, helping the greenback rebound above the 106 levels.

Furthermore, Fed officials have shifted their previously dovish stance seen at the beginning of the year, as progress on inflation has stalled. They are now backing the case for fewer rate cuts this year. Mary Daly, President of the Federal Reserve Bank of San Francisco, mentioned that there’s no urgency to adjust interest rates, citing solid economic growth, a strong labour market, and persistent inflation. Similarly, Austan Goolsbee from the Chicago Fed, stated that the central bank needs to “recalibrate” after a series of higher-than-expected inflation data. Despite this, global equities performed well, fuelled by a rally in technology stocks driven by strong earnings from Microsoft Corp and Alphabet Inc.

COMEX Gold futures closed approximately 3 percent lower, marking their first weekly decline in six weeks, as investors weighed easing geopolitical tensions, mixed US economic data, and hawkish comments from Fed officials ahead of the FOMC policy meeting on May 1st.

Additionally, US Treasury Secretary Janet Yellen expressed confidence in US economic growth following a disappointing preliminary estimate, pushing benchmark US treasury yields to a five-month high of 4.73 percent, thereby denting the appeal of non-yielding bullion. Silver plunged more than 6 percent amid weakness in gold and softer industrial metals.

However, gold may still benefit from safe-haven demand fuelled by concerns about stagflation.

LME base metals closed lower for the last week as markets assessed ongoing property slump in China and US data that pushed back the timing of a Fed pivot. Copper was the only exception, breaching the $10,000 per tonne mark for the first time since April 2022, as BHP Group’s unsolicited all-share takeover proposal for rival Anglo American highlighted supply side challenges amid flourishing demand from AI and green energy.

Meanwhile, WTI Crude oil rebounded from a three-week low of $81.99 a barrel and closed the week 1 percent higher, near $84 a barrel, supported by potential risks from an Israeli invasion of Rafah and fears of a revival of Israel-Iran tensions due to the Russia-Iran military alliance.

Market participants face testing times ahead as the latest US inflation data deepened concerns that the Fed may not lower borrowing costs at all in 2024. Expectations have shifted to just one or two rate cuts this year, beginning in November, compared to previous expectations for September.

In the coming week, focus will be on US and Chinese PMIs, US jobs data, and the FOMC policy meeting. Traders are likely to remain on edge as the Fed is expected to maintain the status quo for a sixth consecutive meeting and deliver a slightly hawkish tone, in line with Powell’s recent statement that the Fed was prepared to keep policy restrictive “as long as needed” if price pressures persist.

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