Commodities likely to remain subdued next week as all eyes on US labour report, manufacturing PMI numbers

Ravindra Rao, VP-Head Commodity Research at Kotak Securities

Commodities closed last week of 2022 on a mixed note as investors assess the economic outlook for 2023.

US dollar extended decline for third week in a row as most economic data indicated that the Fed's monetary policy is leading to slowing economic momentum, thereby calming investors nerves' about harsher Federal Reserve next year.

US pending home sales showed a sharp decline of 4 percent from October's downwardly revised 77.0 to 73.9 in November, in the lowest reading since NAR launched the index in 2001 except early months of COVID pandemic.

COMEX Gold closed higher for a second consecutive week as US jobless claims was in line with expectations, cooling concerns of a tight labour market and in turn eased some bets of aggressive rate hikes in 2023. Also, investment demand was seen rising amid cooling inflation expectations. Silver, on the other hand, held steady near $24 per troy ounce, as gains were limited by higher treasury yields and fluctuation in industrial metals.

WTI Crude slipped nearly 2 percent after starting the week on a positive note buoyed earlier in the week by refinery closures amid freezing temperatures in the US and China scrapping COVID restrictions. However, gains were reversed as several countries responded to China’s easing curbs by imposing testing requirements and led investors to reassess demand outlook.

Base metals ended with weekly gains on softer dollar and hints of stimulus measures by China. However, metals complex is the worst performer in the non-agri commodities space for 2022 as repeated COVID-19 flare ups in top demand driver China weighed heavily on demand outlook, largely offsetting supply side disruptions in some counters. LME Copper and Aluminium, both have witnessed more than 13 percent declines in 2022, while Zinc tumbled more than 15 percent hurt further by absence of any major production curtailments in Europe, which drove prices to record highs of $4,896 per tonne in March 2022.

Volatility is not unusual when it comes to commodities. However, wild price swings in 2022 added to investors’ anxiety as Russia-Ukraine conflict led to both demand and supply side repercussions given that Russia is a major raw material producer. Added to the mix, Fed’s aggressive rate hikes since March and lingering COVID concerns led to heavy fluctuations in commodity prices.

Looming recession, Fed approaching end of tightening cycle, still higher price pressures, are major factors that will determine fate of commodities in 2023. Supply constraints could come to rescue for few commodities like Crude oil and Copper though rising COVID cases in China after sudden end of COVID Zero stance and reporting has added yet another layer of uncertainty.

Next week, commodities are likely to remain subdued as investors will closely watch US labour report and manufacturing PMI figures for hints on economic activity in December. Also, FOMC meeting minutes will keep investors wary in the first trading week of 2023.

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