Commodities may continue to waver as markets cautiously await Fed policy outlook

Ravindra Rao, VP-Head Commodity Research at Kotak Securities

Commodities swung between gains and losses in the week gone by as rising prospects of less aggressive rate hikes by the Federal Reserve countered weakness due to gloomy economic outlook.

Dollar index softened this week as most economic data from the US signalled a slowing economy, adding to bets that the Fed may slow down the pace of monetary policy tightening. Besides, comments by Federal Reserve Bank of San Francisco President Mary Daly that Fed should avoid putting the economy into an "unforced downturn" by raising interest rates too sharply, and it’s time to start talking about slowing the pace of the hikes in borrowing costs, signalled a possibility of some debate among Fed officials over whether to slow down aggressive rate hikes after the November meeting.

Impact of aggressive rate hikes by the Federal Reserve prominently reflects in sluggish US housing market activity in recent months. US new homes sales in September were at an annual rate of 6,03,000, 17.6 percent lower year on year and 10.9 percent down from August’s revised 6,77,000. US economy rebounded more than expected by 2.6 percent in the third quarter amid a decline in the trade deficit, returning to growth after a contraction in the prior two quarters but Fed’s aggressive rate hikes slowed consumer spending.

European Central Bank expectedly raised main refinancing rate by 75 basis points to two percent as euro area inflation remains far too high and reached 9.9 percent in September. Also, ECB expects further weakening in the remainder of this year and into the first part of 2023 as high inflation continues to dampen spending and production.

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COMEX gold and silver traded in a narrow range this week as softer dollar provided a cushion amid declining investment demand. As of this writing, SPDR gold holdings stand at 925.2 tonnes, lowest since March 2020, while iShares Silver holdings have also seen outflows.

WTI crude oil has gained momentum this week supported by robust exports and high refinery activity in the US. As per Weekly Petroleum Status Report for the week ending October 21, US crude exports surged to a weekly record of 5.129 million barrels per day, while refineries operated at a four year high at 88.9 percent of their operable capacity.

LME base metals traded mixed this week as Chinese President Xi Jinping’s new team, filled with his loyalists, clearly indicates an unchanged stance on COVID zero policy. This only escalates economic uncertainty as China reported a third straight day of more than 1,000 new COVID cases nationwide on Thursday, intensifying fears of fresh restrictions. Besides, China’s third-quarter gross domestic product grew by 3.9 percent year on year, beating expectations, but this economic rebound has not been able to calm investor concerns as year-to-date growth is still three percent, well below the official target of around 5.5 percent.

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Overall, commodities may continue to waver as markets now cautiously look forward to any hints on the policy outlook in the Fed two day meeting wherein the central bank is widely expected to announce a fourth consecutive 75 basis point rate hike.

Focus will also be on important economic data from the US including the ISM manufacturing PMI and the NFP print. Besides, investors will be wary as LME decision on Russian metal ban is pending as the exchange is set to receive responses from its users on the same.

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