By Ravindra Rao, CMT, VP-Head Commodity Research at Kotak Securities
Strengthening bets of more rate hikes by the Federal Reserve along with hawkish remarks by major central bankers kept investors wary in the week ended June 30 that marks the conclusion of the second quarter and the first half of 2023.
However, markets did heave a sigh of relief and US bank stocks traded higher after passing Fed’s Stress Test. All 23 of the US banks included in the Federal Reserve’s annual stress test were able to maintain minimum capital levels, despite $541 billion in projected losses for the group, while continuing to provide credit to the economy in the hypothetical recession, as per the Federal Reserve Board.
Also, resilient economic data from the US have defied fears of a recession, though it added more room for the Fed to continue with rate hikes. This pushed two-year treasury yields to three-month high of 4.93 percent, resulting in a yield inversion of more than 1 percent between two-year and ten-year treasury yields. US jobless claims decreased 26,000, largest drop since 2021, to a seasonally adjusted 239,000, while first-quarter GDP estimate was revised upwards to 2 percent, cementing bets for July rate hike and adding to prospects of yet another 25 bps hike in September.
COMEX Gold slipped to $1908 per troy ounce, lowest since mid-March, as higher treasury yields and stronger dollar do not bode well for non-interest yielding bullion. Besides, major central banks, most notably, Fed, ECB and Bank of England, have reiterated further policy tightening will be needed to tame stubbornly high inflation at the ECB Forum.
Oil prices have been wavering as supply tightness concerns counter rate hike fears. Still, Oil prices reported both a weekly and a monthly gain, owing to some support from a substantially higher 9.6 million draw in US inventories and a surprisingly positive US GDP report.
LME base metals have extended declines this week and slipped to fresh monthly lows as most central banks clearly prioritize inflation control even at the expense of economic growth, threatening demand prospects.
Also, double-digit decline in industrial profits and continued contraction in factory activity highlight soft demand and ongoing factory-gate deflation in China. However, it also boosts calls for further stimulus from China especially after optimistic comments by Premier LI Qiang regarding growth and effective measures to expand domestic demand in the World Economic Forum’s Annual Meeting earlier this week.
Now, investors cautiously eye US Core PCE, Fed’s preferred inflation gauge, as any upside surprise could very much cement the case for a July rate hike. US Core PCE is expected to show a 0.3 percent increase in May, slowing from 0.4 percent rise in April and estimated to have increased 4.7 percent on an annual basis.
Investors will now have to brace for more volatility considering the Fed’s economic data dependent timing of any further rate-hike decisions with several important indicators lined up next week. Final manufacturing PMI, FOMC meeting minutes and most importantly Labour report will be cautiously awaited though CME Fed Watch tool already prices in a 87 percent possibility of 25 bps rate hike in the next FOMC meeting.
OPEC meeting will be watched by oil market participants while Saudi Arabia's production cuts of 1 million barrel per day starts from July 1, and the rest of the OPEC producers extending earlier cuts through the end of 2024, in line with the broader OPEC+ agreement to limit supply until 2024.
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