Focus in commodities market to be on economic data, US stimulus plan

Commodities continued their upward momentum on the back of weaker US dollar and increasing optimism about the US economy and hopes of continuing stimulus measures.

LME Copper touched the coveted $10,000 per tonne level while crude oil surged to the highest level since mid-March. Gold witnessed volatile trade as weaker US dollar countered reduced safe haven buying. Agricultural commodities like corn, wheat, and soybean tested eight-year highs as general strength in commodities was coupled with tightness concerns.

Outlook for the US economy has improved significantly owing to progress on the vaccination front which has helped some states ease virus related restrictions.

Optimism rose further this week post the FOMC decision. The Fed kept monetary policy unchanged in line with expectations. The Fed also emphasized on the need for lower interest rate and played down inflation risks indicating that it does not plan to change monetary policy anytime soon. However, the Fed also strengthened the outlook for the US economy.

Adding to optimism about the US economy was upbeat GDP data. US GDP rose at a 6.4 percent seasonally adjusted annual rate in January through March leaving the economy within 1 percent of its peak reached in late 2019, just before the coronavirus pandemic reached the US. However, market players overlooked the disappointing housing data and smaller drop in weekly jobless claims.

Adding to it, President Joe Biden outlined his $1.8 trillion American Families Plan last night, part two of his infrastructure stimulus program, focused on child care, education and paid leave. Market players played down the concerns that higher spending may be compensated by higher taxes on wealthy Americans.

While optimism about the US economy pushed commodities higher, the US dollar turned volatile as US economic optimism was countered by Fed's dovish stance. The US dollar index slipped to 1-month low post Fed decision but saw some stability on upbeat GDP data.

Commodities are on a stronger footing and while it seems that the momentum may continue, there are challenges. Global virus cases continue to rise while mixed economic data from major economies reflect persisting challenges. Meanwhile, continued improvement in the outlook for the US economy could also keep a floor to the US dollar.

Additionally, rising commodities especially fuel and food prices will rekindle inflation concerns dampening risk sentiment. With increasing US economic optimism, focus in the near term may continue to be on economic data as well as development relating to stimulus plan. The key economic numbers in the coming week include manufacturing PMI and non-farm payrolls data. Manufacturing sector has seen significant recovery, however, the labour market has seen some improvement in the last few months.

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