US ISM Services PMI, jobs data may test commodity market nerves next week

US economy is displaying signs of cooling momentum

By Ravindra V Rao, CMT, VP-Head Commodity Research at Kotak Securities

The US economy is displaying signs of cooling momentum, creating a delicate balance between hopes for rate cuts and cautious sentiments expressed by some Federal Reserve officials that have tempered market optimism.

Earlier in the week ended December 1, the dollar slipped to a four-month low of 102.6 as two of the most hawkish Fed officials signaled a possible pause in rate hikes, reinforcing the belief that the current cycle may be completed. While several other Federal Open Market Committee (FOMC) members acknowledged the restrictive nature of monetary policy, they generally expressed support for maintaining interest rates without an immediate readiness for rate cuts.

The greenback rebounded to 103.59 by month-end, erasing weekly losses but still closed November with a notable 3 percent decline, marking its largest monthly drop in 2023.

The easing of inflation pressures and a slowing job market have intensified expectations of a potential Fed pivot. Despite a robust 5.2 percent annualized growth in Q3 GDP and a 3.6 percent increase in consumer spending, recent data reveals a slower pace of Core PCE, rising 3.5 percent year-over-year in October, the slowest since April 2021. Jobless claims also increased, with continuing claims reaching a nearly two-year high of 1.93 million. These factors, coupled with a probable month-end demand, have fueled speculation of a Fed shift in the face of a changing economic landscape.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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COMEX Gold prices experienced a notable surge, reaching a six-month peak at $2073.2 per troy ounce during the week, closely approaching the all-time high of $2089.2 per troy ounce achieved during the pandemic. This upward momentum was driven by a simultaneous decline in treasury yields and the dollar index.

Simultaneously, MCX Gold marked an unprecedented high of Rs 63,356 per 10 grams, partially attributed to the weakness in the domestic currency. The precious metal secured its third consecutive weekly gain, contributing to a second consecutive monthly increase in November. Market dynamics are influenced by the anticipation of Federal Reserve rate cuts in early 2024, further enhancing the appeal of gold.

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Silver mirrored gold's performance, recording a gain of over five percent for the week. From a technical standpoint, gold closed in proximity to its historical highs, approximately $2,089 per troy ounce. Given the presence of multiple resistance zones, a breakthrough and sustained closure above the $2,089 per troy ounce threshold could empower bulls, potentially propelling the price towards the next resistance zone at $2,200 per troy ounce.

Conversely, WTI Crude closed the week around 1 percent lower near $74 per barrel amid skepticism and confusion surrounding OPEC+'s announcement of approximately 900,000 barrels a day in fresh output cuts from January. Market sentiments suggest concerns about the cartel's output being sufficient for a slowing global economy, contributing to the decline in crude oil prices.

In the industrial metals sector, except for copper, prices closed lower due to a rebound in the dollar and mixed PMI figures from China. The contrasting data emphasizes the need for additional stimulus support from Chinese policymakers, as China's official manufacturing PMI fell for the second straight month while Caixin manufacturing PMI surprised on the upside. Notably, a bullish engulf pattern in MCX Copper futures contracts for December delivery has been confirmed, with bulls eyeing the next resistance near 742.

Looking ahead, the US ISM Services PMI and jobs data in the coming week may test market nerves, with the potential for unexpected resilience to prompt traders to recalibrate their rate expectations.

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