FOMC in focus this week as jumbo rate cut could boost market rally further

Commodities Outlook

By Kaynat Chainwala, AVP Commodity Research at Kotak Securities

Commodity markets wrapped up a turbulent week (ended September 13) with a surge of optimism, driven by growing expectations of a jumbo rate cut in the upcoming FOMC (Federal Open Market Committee) meeting. The dollar fell below 101, and the yield on the US two-year Treasury note dropped to 3.56 percent, its lowest point since March 2023. This decline reflected renewed speculation about a significant 50 bps cut scheduled for September 18.

The European Central Bank (ECB) announced a 25 bps rate cut, as anticipated. However, the ECB’s Governing Council moderated expectations for further reductions in October, emphasising a data-dependent, meeting-by-meeting approach to future monetary policy decisions, pushing Euro higher against the dollar.

Swap traders are currently pricing in a 40 percent chance of a 50 basis point rate cut on September 18. Former Fed Chief William Dudley supports this outlook, citing a strong case for such a cut despite persistent core inflation in August.

This fueled a significant rally in US equities, with the S&P 500 and Nasdaq Composite posting their largest weekly gains of the year.

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Kaynat Chainwala

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Anticipation of the Federal Reserve beginning its easing cycle with a 50 bps cut drove COMEX Gold (December) to an all-time high of $2614.6 per ounce. Silver prices also surged, climbing as much as 10 percent to $31.28 per ounce. Market expectations shifted following a rise in US jobless claims, signaling a softening labour market, and moderating inflation indicators, with the CPI showing its smallest gain since 2021 and a modest increase in PPI following a downward revision to July’s figures.

On the daily chart, MCX Gold October futures rose rapidly after breaking above the consolidation (which had been forming for three weeks) barrier of Rs 72,300 last Thursday. On Friday, the price maintained its strong trend, reaching a high of Rs 73,613 per 10 gram. We anticipate price to maintain its positive trend over the coming week, with initial resistance at Rs 74,100, followed by Rs 74,750. On the flip hand, Rs 72,300 will operate as a price support.

WTI Crude oil experienced a notable rebound last week, rising sharply from a 15-month low of $65.3 per barrel to $70 per barrel. This recovery was primarily driven by supply disruptions caused by Hurricane Francine in the Gulf of Mexico and improved risk appetite amid expectations of Fed rate cuts. Earlier in the week, oil prices had dropped to their lowest level since May 2023 due to demand concerns from major consumers like the United States and China, as well as aggressive speculative selling. Additionally, OPEC and the International Energy Agency (IEA) revised their global demand growth forecasts for 2024 and 2025 downward.

Base metals on the LME also gained support from a weaker dollar and hopes for fresh stimulus from China. Prices may continue to rise as China’s retail sales, industrial production, and urban investment all missed estimates in August. This bolsters the case for stronger stimulus, especially after China’s central bank indicated it would intensify efforts against deflation and prepare additional policies to revive the economy.

As markets await the FOMC statement, they are split between the likelihood of a 25 bps and a 50 bps rate cut, as indicated by the CME FedWatch tool. US retail sales numbers, scheduled for release a day before the FOMC announcement, may introduce additional volatility. Meanwhile, the Bank of Japan and the Bank of England are expected to maintain status quo.

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