Soft US labour report ups bets for 2 rate cuts in 2024; commodity markets eye BoE policy decision, Fed officials speeches

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

Renewed hopes for a second rate cut in 2024 emerged following a weaker US labour report, giving markets some reason to celebrate in this anxiety-driven week ended May 3.

Disappointing data releases from the US, coupled with a less hawkish stance from the Federal Reserve, pushed the dollar lower towards the 105 levels. ISM Manufacturing PMI contracted to 49.2 in April from 50.3 in March, and official job openings tumbled to a three-year low of 8.5 million in March. These figures suggest that the US economy may not be as resilient as recent data indicated.

In the much-awaited FOMC meeting, the Federal Reserve kept its benchmark short-term borrowing rate unchanged at 5.25-5.50 percent, as widely expected. However, it announced a slowdown in the pace of balance sheet drawdown from $60 billion to $25 billion a month beginning in June. Fed Chair Powell dismissed concerns of a potential rate hike but reiterated the need for more evidence that price gains are cooling before reducing borrowing costs.

While perceived as less hawkish, this stance provided relief to traders who were concerned about a more aggressive Fed response to signs of stalled inflation progress, pushing dollar lower from its two-week high of 106.49 levels. Softer-than-expected US jobs report erased all the gains in the greenback made over the last three weeks.

Commodity wrap

COMEX Gold witnessed its second weekly drop, slipping below $2,300 per troy ounce due to easing geopolitical tensions, expectations of fewer rate cuts for the year, and a brighter global economic growth outlook. Silver slipped 3 percent in line with weaker gold and softer industrial metals.

LME base metals closed the week on a mixed note, with the expansion in China’s manufacturing PMI boosting hopes of a sustained recovery. However, delay in demand uptick during the seasonal construction period is weighing on the consumption outlook. Meanwhile, deeper losses were seen in crude oil as prices plunged by approximately 7 percent, marking the biggest weekly decline since February, amid a fading geopolitical risk premium, an unexpected surge in US crude oil inventories, and declining gasoline demand ahead of the key summer driving season.

Oil prices may remain under pressure as Hamas reportedly studies a proposal for a temporary cease-fire with Israel and plans to send a delegation to Egypt to continue negotiations. On the weekly chart, MCX Crude Oil (May) has faced resistance near its ‘Falling Channel’ affirming bearish presence. Also, price is trading below its ‘Parabolic SAR’ which will act as a dynamic resistance. Next support for the counter is placed at Rs 6,300 per barrel, below which major support is placed at Rs 6,120.

The latest US labour report is likely to have a temporary impact as it only points to a moderation, and clearly not “an unexpected weakening” that may prompt the Fed to lower borrowing costs. The Fed would like to see sustained weakness in wage growth after average hourly earnings rose 0.2 percent month-on-month and 3.9 percent year-on-year, the slowest pace since June 2021. Nevertheless, signs of emerging stress in the labour market, with non-farm payrolls advancing by 1,75,000 last month, smallest gain in six months, and the unemployment rate ticking up to 3.9 percent, pushed bets of a September rate cut to 80 percent and added to wagers of a second rate cut in the November or December meeting.

Next week, speeches by several FOMC officials will skew Fed pivot bets, while markets eye the Bank of England policy decision. Weak growth and cooling inflation in the UK set a favourable ground for a policy shift. However, MPC (Monetary Policy Committee) officials remain split on the timing of the first rate cut in four years.

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