Commodity markets' risk appetites to depend on next week’s US CPI, retail sales figures

Commodities largely declined this week owing to the reiteration of a hawkish stance by US Federal Reserve (the Fed) officials. Prospects of a recovery in Chinese demand in the coming weeks managed to provide some cushion.

The Dollar held above 103 on the US Dollar index for most of the week, sharply rebounding from the nine-month low of 100.8 touched in the last week, as a robust US labour report revived bets of more rate hikes by the Federal.

The US Department of Labor reported that the total non-farm payroll had risen by 5,17,000 in January, far higher than market expectations of 1,90,000, and the unemployment rate was at 3.4 percent, the lowest unemployment level since May 1969.

Following the jobs data, Fed funds rate expectations rose to above 5 percent compared to earlier bets of just under 4.9 percent by June. They are now expected to peak at 5.12 percent in July, and then fall to 4.82 percent by December.

The Dollar pulled back from the weekly high of 103.8 after a less-hawkish-than-expected commentary by the Fed Chair Jerome Powell, who said that if the job market remains very hot, he may need to do further rate hikes.
However, several Fed policymakers hinted at further tightening of monetary policy to combat inflation. The President of the Federal Reserve Bank of Richmond, Thomas Barkin, said it was important for the central bank to continue to raise interest rates to ensure it brings inflation back to the 2 percent target. Federal Reserve Governor Christopher Waller said though the US economy was adapting to higher interest rates, further tightening was necessary to bring inflation back to the central bank's target. New York Fed President John Williams stressed on the need to attain a sufficiently restrictive policy stance.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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COMEX Gold and Silver traded in a narrow range this week in line with stronger Dollar and higher US treasury yields, as FOMC members hinted rates would go higher. However, looming fears of a recession kept gold in the positive territory as two-year treasury yields exceeded 10-year treasury yields by as much as 86 basis points (bps) on Thursday. Investment demand in gold remained muted as SPDR holdings held nearly 920 tonnes, while Silver iShares saw an inflow of 225 tonnes so far this week.

WTI and Brent Crude both rebounded sharply this week and rallied more than 8 percent. Crude oil prices started the week on a high following an 8 percent decline in the previous week with Saudi Arabia raising its Official Selling Price (OSP) for Asian buyers, buoyed by supply concerns due to the devastating earthquake in Turkey, and demand optimism.

The OSP for March-loading Arab Light to Asia was reportedly raised by 20 cents a barrel from February to $2.00 a barrel over Oman/Dubai quotes, its first increase in six months amid an expectation of oil demand recovery, especially from China. The Energy Information Administration (EIA) expects China’s oil demand to increase by 7,00,000 bpd (barrels per day) this year, and by 4,00,000 bpd in 2024, as the country pivots away from a zero-Covid policy. Prices held on to higher levels despite easing of supply concerns as the oil infrastructure in Turkey apparently did not witness any serious damage.

On the LME (London Metal Exchange) base metals mostly remained under pressure amid lack of visible signs of Chinese demand recovery after the Lunar New Year holidays. LME copper fell to a one-month low of $8,808 per tonne as initial optimism regarding a pause in rate hikes soon dimmed after the robust US jobs report and hawkish commentary by several FOMC members.

Aluminium slipped below $2,500 per tonne, weighed down by a sharp increase in LME stocks which jumped by 1,05,550 tonnes, the biggest since February 10, 2022. Data showed LME inventory soared 27 percent to 4,95,750 tonnes, the highest in about two months, after arrivals in Gwangyang in South Korea.

Next week, markets' risk appetites will be largely dependent on the US CPI (consumer price index) and retail sales figures, as they could drop crucial hints on whether inflation risks are moderating or not. Besides, the University of Michigan’s (UoM) inflation expectations may set the tone for the Dollar and the markets early next week.

The Yen is likely to see more upside against the Dollar as Nikkei reported that the Japanese government plans to appoint Kazuo Ueda, an economist and former member of the Bank of Japan Policy Board, as the successor to current Governor Haruhiko Kuroda. Earlier, it was expected that Deputy Governor Masayoshi Amaniya, a known dove, would be appointed.

Crude oil may see further support from Russian plans to cut its March oil production by 5,00,000 barrels a day, or around 5 percent of its January output, in response to western price caps.

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