Commodity markets await more supportive data next week to solidify expectations for Fed rate cut in September

Commodities Outlook

Kaynat Chainwala, AVP Commodity Research at Kotak Securities

Markets closed the week ended July 5 on an optimistic note as visible signs of a slowdown in the US economy bolstered prospects for Federal Reserve rate cuts.

Dollar was supported well above 105 levels in the earlier part of the week supported by a somewhat dovish commentary by Fed Chair Jerome Powell and simmering tensions in the Middle East. Fed Chair Jerome Powell acknowledged progress in inflation in getting back on a downward path but reiterated that officials need more evidence before lowering interest rates. This, coupled with unexpected increase in US JOLTs Job Openings in May pushed greenback to a two-month high of 106 levels. However, dollar pulled back from higher levels and closed at a seven-week low of 104.88 after the official jobs report indicated a steady slowdown in the labour market.

Data from the Bureau of Labor Statistics showed the US economy added 2,06,000 non-farm payroll jobs in June, more than the Bloomberg estimate of 1,90,000, but it is to be noted that job growth in the prior two months was revised down by 1,11,000. At the same time, the unemployment rate ticked up to 4.1 percent, highest since November 2021 and wage inflation continued to cool as Average hourly earnings rose 3.9 percent in June from a year ago, smallest annual advance in three years.

Overall, the report did confirm a moderation in US labour markets and raised the odds of a September Fed rate cut, lifting S&P 500 and Dow Jones to record highs and pushing COMEX Gold above $2,400 per troy ounce for the first time since early June. According to CME’s FedWatch Tool, Futures markets are now pricing in 72 percent chance for a 25 bps rate cut at the Fed’s meeting in September, up from a 57.9 percent chance seen a week ago. Silver rallied as much as 6.5 percent this week, in line with sharp gains in both gold and base metals.

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MCX Gold (Aug), on the four hourly chart has given an upward breakout of its ‘Cup & Handle’ chart pattern confirming an upward bias. In addition, RSI (14) is hovering around 74.80 levels indicating dominance of the bulls. Next resistance for the counter is placed at Rs 73,550 per 10 grams above which major resistance is placed at Rs 74,000.

LME base metals closed the week higher, with copper leading the pack with nearly 4 percent gains, as Fed rate cut optimism far outweighed concerns of a patchy recovery in China. WTI Crude oil hit $84.52 per barrel, highest since late April, buoyed further by concerns of a more severe storm season, largest inventory drawdown in over a year and escalating geopolitical tensions. Oil is set for more gains as the Lebanese Hezbollah group launched over 200 rockets on Thursday at several military bases in Israel in retaliation for an attack that killed one of its senior commanders.

Following the release of official jobs data, markets are now awaiting more supportive data to solidify expectations for a September rate cut, starting with US inflation figures next week. US CPI is expected to rise by 0.1 percent after remaining unchanged in May, while Core CPI is expected to hold steady at 0.2 percent. A larger-than-expected increase could prompt investors to reconsider the likelihood of a Fed rate cut, while a negative surprise could bolster market confidence even further. Fed Chair Powell's testimony will be closely watched, although it's unlikely he will provide hints on the monetary policy outlook. Besides, Chinese CPI is expected to improve to 0.4 percent in June, following stagnant price growth at 0.3 percent in April and May, while PPI deflation is projected to narrow further to 0.8 percent. If both indicators meet these estimates, it would indicate an improvement in domestic demand.

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