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By Ravindra V Rao, CMT, VP-Head Commodity Research at Kotak Securities
The initial optimism in the commodities markets proved short-lived due to growing speculations that persistent high US inflation would maintain elevated interest rates.
The latest US consumer price index (CPI) report indicated a continued easing of underlying price pressures, showcasing the Federal Reserve’s progress in taming inflation. In July, US core CPI increased by 0.2 percent month-on-month and 4.7 percent year-on-year, the lowest since October 2021. Additionally, CPI rose by 0.2 percent month-on-month and 3.2 percent year-on-year, a significant drop from the 9 percent seen in June 2022 but still surpassing the Federal Reserve’s 2 percent target.
Following the release of the inflation report, traders increased the likelihood of the Fed maintaining its position at the September meeting by around 4 percent, reaching approximately 91 percent. Nonetheless, mixed comments from various Fed officials and the Fed’s data-dependent approach suggest that the central bank might persist with a hawkish stance to prevent inflation from resurging, even after signs of easing inflation.
Furthermore, the Dollar surged to a one-month high of 102.79, driven by safe-haven buying spurred by Moody’s decision to downgrade the credit ratings of several small and mid-sized US banks, while also placing a number of major Wall Street entities under negative review.
Over the past three weeks, COMEX Gold experienced a continuous decline as the recent US CPI report hinted at the Fed possibly maintaining higher rates for a more extended period without triggering a recession. This development aided the Dollar Index in recovering from levels below 102. Concurrently, higher treasury yields continued to weigh on non-yielding gold, causing its prices to approach a one-month low and record its weakest weekly closure in seven weeks.
China’s lack of concrete stimulus measures, despite ongoing signs of a feeble recovery, exerted downward pressure on metals within a range of 2-5 percent. Both Consumer Price Index (CPI) and Producer Price Index (PPI) contracted in July for the first time since November 2020. Additionally, China’s exports and imports decreased by 14.5 percent and 12.4 percent year-on-year in July, respectively.
Crude oil experienced a reversal in its gains earlier in the week, as the strength of the Dollar pulled prices lower from resistance. However, on a positive note, the International Energy Agency (IEA) indicated a tightening market for this year, accompanied by an OPEC report suggesting a significant supply deficit of more than 2 million barrels per day in this quarter.
Presently, the markets remain cautious due to conflicting statements from Fed policymakers, which have clouded the outlook on monetary policy. The forthcoming FOMC meeting minutes could provide insights into the rationale behind the July policy decision. Traders will also closely monitor US retail sales data next week to ascertain whether they remained subdued in July after a modest 0.2 percent increase in June.
In the week ahead, China’s retail sales and industrial production figures for July will also garner significant attention. China’s ongoing display of weak demand and increasing deflation risks is evidenced by new loans reaching their lowest monthly amount since 2009, putting pressure on policymakers to boost monetary and fiscal stimulus, despite concerns about high debt levels in the economy.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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