Central bank meetings and US economic indicators spark uncertainty in commodity markets

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

Investor’s nerves are on edge as the Federal Open Market Committee (FOMC) and Bank of England (BoE) gear up for their respective meetings, while the latest US economic data and China’s liquidity-boosting plans contribute to wavering risk sentiments.

The greenback surged to a six-week high of 103.81, and US 10-year treasury yields approached 4.19 percent following robust economic data, prompting traders to adjust their expectations for aggressive rate cuts. The US economy defied recession calls, closing 2023 with a surprisingly strong 3.3 percent annualized growth in the last quarter and a full-year growth of 2.5 percent, exceeding forecasts. However, not all data brought good news, with flat US durable goods orders in December and a higher-than-estimated 214,000 initial jobless claims last week disappointing investors.

In its January meeting, the European Central Bank (ECB) opted to keep deposit facility rates at an all-time high of 4 percent, signalling a commitment to maintaining these rates to address concerns about a looming recession and easing inflationary pressures. Despite the challenges, the ECB remains determined to bring inflation back to its 2 percent target.

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Gold prices on the COMEX fell to a one-week low of $2004 per troy ounce as hopes for an early Fed pivot to monetary easing diminished. Strong retail sales figures and higher-than-expected Q4 GDP numbers highlighted US consumer resilience to high-interest rates. COMEX Silver experienced a similar trajectory, initially slipping to near $22 per troy ounce but recovering as industrial metals rallied, pushing it above $23 per troy ounce.

Global trade disruptions in the Red Sea and a significant draw in US oil stocks propelled WTI Crude oil prices to a two-month high of $77.5 per barrel. US inventories fell over 9 million barrels last week, six times more than forecasted, reaching their lowest level since October. The ongoing threat from Yemen’s Houthi group to target ships linked to Israel until aid reaches Gaza adds to concerns about elevated oil prices.

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LME base metals rallied on the back of optimism surrounding additional stimulus from China. Reports of a Chinese stock market rescue package and comments from People’s Bank of China Governor Pan Gongsheng about cutting the reserve requirement ratio for banks in early February fueled the rally. The rare move of pre-emptively announcing a reserve requirement ratio cut in response to economic concerns underscored mounting disappointment with the government’s actions.

Copper and Zinc surged to their highest levels since early January, while Aluminium crossed the $2,250 per tonne mark. Positive developments in Flash Manufacturing PMI in the EU and UK, coupled with expanding factory activity in the US in January, provided additional support.

As the markets shift focus to the upcoming US Core PCE data, estimated to have risen at an annual pace of 3 percent in December, down from November’s 3.2 percent, investors anticipate potential relief if Core PCE continues to cool. This comes ahead of the FOMC meeting next week, where both the FOMC and BoE are expected to maintain rates.

Market participants will carefully scrutinize policy guidance, with particular attention on any softening of language by the Fed regarding progress in easing inflation, which could impact the dollar given the ECB’s recent stance on rate cuts.

Amid heightened volatility driven by central bank meetings and the US labour report, the upcoming 0.5 percentage point cut in China’s Reserve Requirement Ratio (RRR) on February 5 and indications of additional stimulus offer a glimmer of optimism in an otherwise uncertain landscape.

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