Commodity market participants to focus on PCE price index, US GDP, ECB interest rate call this week

Commodity market participants will closely watch the ECB's monetary policy decision

In the financial landscape, optimism over rate cuts waned as robust US economic indicators and hawkish central bank comments contradicted market expectations. The Dollar Index surged to a noteworthy one-month high of 103.69, fuelled by signs of resilient consumer spending and robust job growth. This surge prompted swap traders to reevaluate their expectations for a rate cut in March, reducing the probability from almost 80 percent at the end of the previous week to 52 percent.

The catalysts behind this adjustment were encouraging US retail sales data, showcasing a 0.6 percent month-on-month increase in December, surpassing forecasts and indicating a strong finish to 2023 for the US economy.

Accompanying the positive retail sales figures were upticks in industrial production and manufacturing output, highlighting the American consumer's resilience to higher interest rates. These developments set the stage for the next week's eagerly anticipated fourth-quarter GDP data, which is poised to provide further insights into the overall health of the US economy.

Precious metals closed the week on a negative note as the optimistic US economic data prompted investors to reassess the likelihood of imminent interest rate cuts. The prevailing aggressive market pricing for a Q1 2024 rate cut posed a near-term challenge for gold prices. Despite geopolitical tensions in the Middle East offering some support, the combination of better-than-expected retail sales, CPI data, and a hawkish stance from Federal Reserve officials suggested that the central bank was in no rush to loosen its monetary policy.

WTI crude oil prices, on the other hand, surged to a three-week high of $74.46 per barrel, buoyed by escalating tensions in the Middle East and optimistic global oil demand forecasts from both OPEC and the International Energy Agency (IEA). While OPEC maintained a robust outlook with a projected world oil demand growth of 2.25 million barrels per day (bpd) in 2024, the IEA took a more conservative stance, forecasting a growth of 1.24 million barrels per day for the year.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Geopolitical tensions remained high as US President Joe Biden announced the continuation of airstrikes following multiple attacks on Houthi targets in Yemen, a situation that continued to disrupt maritime routes.

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LME base metals experienced another weekly decline, influenced by a sluggish economic recovery and concerns about the fragile state of the Chinese real estate market. China's Q4 2023 GDP growth of 5.2 percent (below the 5.3 percent forecast) and disappointing retail sales figures contributed to market disappointment. The unexpected decision by China's central bank to maintain the rate on its medium-term lending facility at 2.5 percent further dampened sentiment.

Looking ahead, the focus for the coming week centres on key events such as the Federal Reserve's preferred PCE price index and US Q4 GDP data. Additionally, market participants will closely watch the European Central Bank's (ECB) monetary policy decision, particularly after some members of the Governing Council pushed back against aggressive easing calls, acknowledging potential upside risks to inflation. This uncertainty adds an element of anticipation to the market, as the ECB is widely expected to consider easing in the second quarter.

The People's Bank of China is expected to keep its Loan Prime Rate (LPR) unchanged, with traders remaining cautious following Chinese Premier Li Qiang's remarks emphasizing the economy's achievement of over 5 percent growth in 2023 without relying on massive stimulus.

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