Commodities may take cues from second estimates for US Q4CY22 GDP next week

Largely positive economic data from the US and hawkish stance by several FOMC officials have opened up the possibility of more rate hikes by the Federal Reserve while pushing back expectations of a rate cut in 2023.

Initial reaction to the US CPI data was negative for dollar as it eased market fears of a hotter inflation reading, pushing the greenback to 102.58. As per data from the Bureau of Labour Statistics, US consumer price index increased 0.5 percent in January, boosted in part by rising gasoline prices, which increased 3.6 percent in January, but CPI grew 6.4 percent YoY, the smallest gain since October 2021, and following a 6.5 percent rise in December. However, decline in the greenback was reversed thanks to hawkish comment by Fed officials.

Harker’s Richmond Fed counterpart Thomas Barkin told Bloomberg TV that the central bank might “have to do more” to fight inflation and Dallas Fed President Lorie Logan said rate increases could last “for a longer period than previously anticipated.” Also, US producer price index, rose 0.7 percent month-on-month in January, beating expectations and witnessing the biggest increase since June, fueled by a 5 percent rise in energy costs while core PPI increased 0.5 percent, compared with expectations for a 0.3 percent increase. Following the PPI figures, Federal Reserve Bank of Cleveland President Loretta Mester and St. Louis President James Bullard backed the case for bigger rate hikes, to a level that’s high enough to bring inflation down to their target.

COMEX Gold hit a six-week low of $1,827.2 per troy ounce as higher CPI and PPI figures in the US provided further evidence of a sticky inflation, boosting dollar and treasury yields. Widely watched CME Fedwatch tool shows US money markets now expect Federal funds rate to climb to 5.2 percent in July from 4.5 percent to 4.75 percent target range at present and compared with a perceived peak rate of 4.9 percent just ahead of FOMC meeting. Also, two members supported 50 bps rate hike and stated policymakers need to be open to bigger rate hikes going forward if economic conditions warrant. This has pushed dollar to 104.5, sharply higher from 100.8 level seen in early February. Investment demand has also remained muted for second week.

According to a government source, gold imports in India, world’s second biggest consumer, plunged 76 percent YoY in January to a 32-month low at 11 tonnes as rally to record high prices led to subdued demand while jewellers postponed purchases keenly waiting for a reduction in import duty. Similarly, Silver slipped to $21.17 per troy ounce, lowest since November 2022 hurt by weakness in both gold and industrial metals. Minor inflows of 33 tonnes in iShares silver trust etf holdings could not help cushion prices.

Crude oil prices remained under pressure this week as markets assess higher US stocks and prospects of further Fed policy tightening against signs of improving Chinese demand. As per EIA estimates, US commercial crude oil inventories increased by 16.3 million barrels from the previous week to 471.4 million barrels, highest since June 2021 and about 8 percent above the five-year average for this time of year. Besides, Export loadings at the Baku-Tbilisi-Ceyhan pipeline from Turkey, that were disrupted after earthquakes hit Turkey and Syria resumed from Ceyhan on February 13. There were positive updates as well as both OPEC and IEA revised their 2023 global oil demand growth projections higher by 100,000 bpd from last month forecast owing to expectations of Chinese demand growth. Also, Saudi Arabia’s energy minister reiterated that OPEC+ alliance plans to stick with an oil deal agreed in late 2022 for the rest of the year.

LME Base metals weakened further this week largely hurt by prospects of higher interest rates in the US for longer. Copper is likely to be the only gainer for the week, albeit with a marginal upside, as it got support from lingering supply disruption concerns. Peru’s top copper mines, Chinese-owned Las Bambas and Glencore PLC’s Antapaccay are currently the worst affected by protests and blockades in Peru as a Reuters analysis of daily power use data from COES, shows that at least these two key mines are now regularly drawing only half their normal power as key supplies needed for mining operations has run out, suggesting they are in ‘care and maintenance’ mode. Aluminium slipped below $2,400 per tonne hurt by sharp increase in inventories at the LME warehouses and no enforcement of the feared output reduction in Yunnan province yet.

Next week, commodities may take cues from US Preliminary GDP which showed a sharp rebound in the previous quarter despite higher interest rates following favourable retail sales and manufacturing data this week. Most importantly, FOMC meeting minutes and Core PCE, Fed preferred inflation gauge, will be closely watched to see if price pressures have continued to moderate after it eased to 4.4 percent YoY in December. Besides, Flash manufacturing and Services PMI from major global economies may drop earliest hints on the economic activity in February.

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