‘Is the Fed done?’ The four words, central to the debate on whether the U.S. central bank is ready to pause on rate hikes, could shape the narrative across markets, including commodities, for the foreseeable future as inflation and recession prospects counteract the demand for raw materials such as oil and gold.
On Friday, we again witnessed the impact of this buzz-phrase as Federal Reserve Governor Christopher Waller, one of the biggest rate hawks, said he desired more monetary tightening despite evidence that inflation in the United States was steadily coming off the highs of recent months.
Waller’s call helped trigger a mini-crash in prices of gold, which until Thursday had seemed to be on track to a new record peak. Higher interest rates tend to benefit the dollar and weigh on gold. While the yellow metal is a popular insurance against economic and political troubles, it does not yield anything.
Gold wasn’t the only commodity that took a hit from Waller’s remarks on Friday. The dollar’s rebound from a one-year low also led crude to settle with just a modest advance instead of what might have been larger gains, after global energy agency IEA upgraded oil's demand prospects in 2023.
“Hawkish Fed comments raised the risk that the Fed could do more tightening beyond May and that rates might need to stay higher for longer,” said Ed Moya, analyst at online trading platform OANDA.
The Fed has added 475 basis points to rates over the past 13 months, taking them to a peak of 5% from the 0.25% level they were at during the start of the COVID-19 outbreak in March 2020.
Ahead of Waller’s remarks on Friday, some economists were actually betting on the Fed to pause on rates at its next policy decision on May 3rd.
This was after the Consumer Price Index — a barometer for inflation — expanded at an annual rate of 5% in March versus February’s 6%. In June, the so-called CPI was up 9.1% on the year, hitting a four-decade high. The Fed’s own appetite for inflation is just 2% per annum.
CPI aside, U.S. wholesale prices fell their most in nearly three years last month, according to a separate reading on inflation.
Despite the easing inflation picture, some economists still priced in a 25 basis point hike on May 3. This was because of the U.S. jobs report for March, which saw non-farm payrolls growing by almost 240,000 versus the Fed’s desire for growth of less than 200,000.
The Fed has a particularly delicate job in trying to balance the growth in jobs and wages with that in inflation. Both are top priorities for the central bank, which is mandated with ensuring “maximum employment” through a jobless rate of 4% or below, and keeping inflation manageable at around 2% per annum.
One of the Fed’s biggest challenges has been stellar jobs data as the nation’s labor market continues to stun economists with stupendous growth month after month.
While policy-makers the world over typically celebrate on seeing good jobs numbers, the Fed faces a different predicament. The central bank wishes to see an easing of labor conditions that are a little “too good” now for the economy’s own good — in this case, unemployment at more than 50-year lows and average monthly wages that have grown without stop since March 2021.
Such job security and earnings have cushioned many Americans from the worst price pressures since the 1980s and encouraged them to continue spending, further feeding inflation.
Economists say monthly jobs numbers need to grow meaningfully below expectations to create some ding at least in employment and wage security which the Fed suggests are its biggest two headaches now in fighting inflation.
“Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further,” Waller said on Friday.
The Fed governor said he would welcome signs of moderating demand, “but until they appear and I see inflation moving meaningfully and persistently down toward our 2% target, I believe there is still work to do.” Uncoded, that meant more rate hikes.
Gold: Market Settlements and Activity
The fantasy ride of gold bulls was cut short on Friday by the dollar’s ramp-up from a one-year low, handing those long on the yellow metal their biggest loss in three weeks.
Gold for June delivery on New York’s Comex did a final post-settlement trade of $2,017.70 an ounce after officially closing the session at $2,015.80 — down $39.50, or 1.9%, on the day. The session low on June gold was $2,006.20.
The slump wiped out all of Thursday’s rounded-up gain of $30, or 1.5%, in June gold. It was the largest one-day decline in a front-month Comex gold contract since a 2.1% fall on March 31. For the current week, June gold finished down 0.5%.
The spot price of gold, more closely followed than futures by some traders, settled at $2,004.26, down $35.85, or 1.8%. It got to a low of $1,992.46 during the session.
Until Friday’s abrupt turn, gold bulls had one of their most euphoric runs in under a week, gaining more than $50, or 2.6%, in just three sessions between Monday’s close and Thursday’s settlement.
“Over the short-term, gold could remain very volatile in both directions here,” said OANDA's Moya.
Notwithstanding gold’s latest setback, Moya said there were enough reasons for investors to stay positive on the safe haven.
“Hawkish Fed comments raised the risk that the Fed could do more tightening beyond May and that rates might need to stay higher for longer,” he added. “In order for inflation to be conquered, we will need to see economic pain and that should support the bullish case for gold.”
Gold: Price Outlook
Gold’s previously-strong momentum now suffers a stiff resistance, as the dollar’s bounceback on Friday pulled the spot price of the yellow metal down from the week’s high of $2,048 to a $1,992 low, constituting a massive $56 drop, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
Spot gold’s weekly closing at $2,004 also forms a so-called indecision Doji above the 5-week Exponential Moving Average, or EMA, of $1,976.
“Going into the week ahead, a restoration of bullish momentum hinges on the ability of longs to defend support areas of $1,992 and $1,988, failing which more declines towards $1,976 and $1,967 can be witnessed,” said Dixit.
“On the higher side, spot gold needs to make a sustained break above $2,020, followed by $2,032, in order to resume the uptrend, which targets retesting $2,048 and $2,055 before taking on the current all-time high of $2,073.”
Oil: Market Settlements and Activity
Oil markets rose for a fourth consecutive week, riding on global energy agency IEA’s upgraded demand prospects for 2023, although gains for Friday were cut by a resurgent dollar, which is usually bearish for commodities.
New York-traded West Texas Intermediate, or WTI, did a final post-settlement trade of $82.68 per barrel after officially closing Friday at $82.43 — up 27 cents, or 0.4%, on the day. For the week, the U.S. crude benchmark rose 2.3% from the April 6 settlement of $80.70.
London-traded Brent, the global benchmark for crude, settled at $86.31 per barrel after officially closing at $86.63 — up 54 cents, or 0.3%. For the week, Brent gained 1.4%.
Crude prices lost much of their upward momentum after Fed Governor Waller’s remarks favoring more rate hikes. Higher rates tend to benefit the dollar and weigh on oil.
Oil rallied earlier in the day after the Paris-based International Energy Agency, IEA, said demand for crude could hit a record peak in 2023, helped by a spike in consumption by top importer China.
But the IEA also warned that the surprise oil output cut announced earlier this month by producer group OPEC+ risks exacerbating a projected supply deficit and could scupper economic recovery.
“Consumers confronted by inflated prices for basic necessities will now have to spread their budgets even more thinly,” the IEA said. “This augurs badly for the economic recovery and growth.”
OPEC+ groups the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent oil producers, including Russia. The wider alliance announced on April 3 that it will cut a further 1.7 million barrels daily from its output, adding to an earlier pledge from November to take off 2.0 million barrels per day.
OPEC+, however, has a history of over-promising and under-delivering on production cuts. While the group achieved over-compliance on promised cuts in the aftermath of the 2020 coronavirus breakout, experts say that was more a result of battered demand that led to minimal production, rather than a will to cut barrels as pledged.
Oil: Price Outlook
A settlement for WTI next week above the 50-week EMA of $82.60 will bring further strength for U.S. crude that could carry it through the 200-Day Simple Moving Average of $82.90 and the 100-week SMA of $84.80, said SKCharting.com’s Dixit.
“We have a major upside target for WTI on the Monthly Middle Bollinger Band at $87,” adds Dixit.
“On the downside, the 5-Day EMA of $81.90 acts as support, failing which U.S. crude looks set to drop to $80.40 and $79.30.”
“If selling intensifies below the horizontal support zone of $79.30, WTI can come crashing down towards the breakout point to fill the gap left at $75.70, which is our major target on the downside.”
Natural gas: Market Settlements and Activity
Natural gas futures overcame the odds on Friday to rally to a positive weekly close, after five weeks in the red.
But technical charts suggested that without a steady upward trajectory, the front-month gas futures contract on the New York Mercantile Exchange’s Henry Hub could slip back under the key $2 support level.
The hub’s most-active May gas contract did a final post-settlement trade of $2.106 per mmBtu, or million metric British thermal units, after officially closing on Friday at $2.114 — up 10.7 cents, or 5.3%.
For the week, May gas was also up by about 5%, logging its first weekly gain since the week ended Feb. 24, when it settled up 23% at just above $3 per mmBtu.
Despite its positive finish on Friday, the front-month gas contract hit a session low of $1.948 in early trading, signaling that it was still vulnerable to sub-$2 pricing in the coming week.
Friday’s session low in gas came after the U.S. Energy Information Administration, or EIA, reported that gas-in-storage in the United States rose by 25 billion cubic feet, or bcf, last week in the first series of injections for the spring season.
While that build was smaller than the 28-bcf injection forecast by industry analysts, what weighed on market sentiment was the size of gas inventories as a whole.
Last week’s injection took the balance in gas storage to 1.855 trillion cubic feet, or tcf, the EIA said.
That was 33% above the year-ago storage level and nearly 19% higher than the five-year average for gas inventories.
The 2023 pre-summer injection season is starting with one of the most bloated gas storages, courtesy of a winter that ran mostly warm, with some of the fewest snow storms ever.
Typically, this is a time when storage is at seasonal lows after large and consistent withdrawals during winter, when gas is burned for heating.
“Future builds are also expected to be slightly larger than normal due to warmer average temperatures across the US and could put surpluses back above 350 bcf,” Houston-based energy markets advisory Gelber & Associates said in an outlook issued Friday.
Natural gas: Price Outlook
Despite the weak demand situation for gas, price action on the Henry Hub indicates clear momentum accumulation from the horizontal support base formed at $1.94 and was attempting to break above the 5-week EMA of $2.21, said Dixit.
“Going into the week ahead, we’re looking at a potentially bullish structure, which will need affirmation via a weekly break and close above the Daily Middle Bollinger Band of $2.18. If that succeeds, then the 5-week EMA of $2.21 will kick in, followed by the 50-day EMA of $2.57 and the swing high of $3.02.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.