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Commodities Week Ahead: Inflation Test for Oil, Gold Soon After Fed Rate Hike

Published 05/08/2023, 05:02 PM
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  • Wednesday will bring the U.S. CPI report for April, forecast to show sticky inflation
  • Fed chatter on whether there’ll be a June hike or not could bombard markets
  • China data expected to show slower exports and inflation
  • Those long oil and gold aren’t getting much room for breather: Right on the heels of the latest Fed rate hike and U.S. jobs numbers is this week’s inflation test.

    The dynamic on whether the Federal Reserve will hike rates or not when it meets in the next five weeks could also see markets bombarded with debates from the central bank’s policymakers, resulting in undue volatility in everything from the U.S. dollar to equities and commodities.

    After the Fed’s May policy meeting, which concluded Wednesday, the blackout period for announcements and speeches by the central bank’s Federal Open Market Committee was broken as early as Friday by three members of the FOMC: James Bullard of the St. Louis Fed, Neel Kashkari of the Minneapolis Fed and Fed Governor Lisa Cook.

    Of the three, Bullard, who’s most hawkish on rates, was, unsurprisingly, the most audible too. He played down concerns that more rate hikes would do more damage to the U.S. banking sector — despite the popular opinion on Wall Street that the Fed’s undue tightening almost single-handedly triggered the banking contagion that has swallowed at least three regional banks and was threatening more.

    Bullard’s point: The ultimate impact of bank stress on the economy will be small. In other words, a rate hike on June 14 would be totally fine, according to him.

    Wednesday, meanwhile, will bring the April reading for the Consumer Price Index, the single most closely watched inflation indicator in the United States that will tell if prices are receding any faster than forecast in the world’s largest economy.

    Economists are expecting core CPI, which excludes volatile food and fuel prices, to increase by 5.5% on a year-over-year basis after a 5.6% increase a month earlier. The headline rate of inflation is expected to increase by 5% annually.

    That would indicate that while price pressures are moderating, they remain sticky. The U.S. central bank delivered its tenth straight interest rate increase last week, as widely expected, but indicated that it may pause its aggressive tightening campaign at its next meeting in June.

    A weaker-than-expected reading would bolster expectations for a Fed rate cut later this year, but an above-forecast print would support the case for the Fed to keep rates higher for longer. Friday’s employment report for April showed that jobs growth and wage gains remain resilient, undercutting fears over the prospect of a recession.

    Crude prices rose on Friday, snapping four days of losses in a row for U.S. crude and three for global benchmark Brent.

    U.S. crude’s West Texas Intermediate, or WTI, benchmark settled up 4% on the day but down 7% on the week, impacted by the banking contagion and economic worries in the United States. It was a third straight week in the red for WTI after prior losses of 1.2% and 5.8%, respectively, for the weeks ended April 28 and April 21.

    London-traded Brent also gained about 4% on Friday while finishing the week down about 5%, following prior weekly losses of 2.6% and 4.9%. At the time of writing, WTI was up 1.67% at $72.54 per barrel, while Brent was 1.62% higher at $76.52 in Asia’s afternoon trading.

    Tina Teng, an analyst at London-based CMC Markets, said,

    "Oil's rebound follows energy stocks' comeback on Wall Street last Friday after the U.S. reported strong job data, which eased concerns about an imminent economic recession that led to the selloff early in the week.”

    PVM oil market analyst Stephen Brennock concurred.

    "Rather than underlying fundamentals, the selling frenzy over the past week has been driven by worries about demand linked to recession risks and the strain in the U.S. banking sector,” Brennock said. "The upshot is that there is a big disconnect between oil balances and oil prices."

    As well as the CPI numbers, the U.S. economic calendar also features the producer price index on Thursday, along with weekly numbers on initial jobless claims. Aside from U.S. data, a string of economic reports out of China will offer further insight into the uneven post-COVID recovery in the world’s second largest economy.

    China’s April trade data is due out on Tuesday and is expected to show exports slowed after a surge higher in March. Chinese Inflation figures for April are due on Thursday and are expected to show that price pressures are weakening.

    Data last week showed that activity in China's manufacturing sector unexpectedly shrank in April, adding to pressure on policymakers to boost an economy struggling to sustain momentum amid subdued global demand and persistent weakness in the property sector.

    Analysts warn that the Chinese momentum could further ease as domestic consumption has yet to fully recover and that more policy support is needed.

    In gold’s case, inflation aside, sentiment has also been propped up by a resurfacing of the U.S. banking crisis that broke in March. Adding to that were concerns about a potential U.S. debt default, the first-ever and more weak readings on factory orders and durable goods.

    As a safe haven, gold is a hedge against those concerns. Gold “still has a good chance to get back in a record-setting mood,” said Ed Moya, an analyst at online trading platform OANDA. Moya pointed out that U.S. banking worries weren’t about to go away anytime soon due to how exposed the regional banks were to commercial mortgages. He said,

    “Regulators are scrambling and don't have a clear plan to address the regional-banking crisis,” Moya said, adding that requiring big banks to provide money to refill the deposit insurance fund hole left by failed smaller ones was “just another band-aid solution”.

    Gold for June delivery on New York’s Comex settled down 1.5% on Friday and up 2% on the week after a record high at above $2,080 an ounce. In Monday’s trade, the benchmark gold futures contract was up about 0.2% to just under $2,029.

    The gold spot price needs to reclaim the $2,028-$2,032 zone in order to resume the uptrend, which will target $2,050 and $2,080, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. He added,

    “The initial resistance on the upside would be $2,098,”

    ***

    Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

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