What is the impact of the Fed's high-intensity interest rate hike on commodities?

Under the continued high level of global inflation, the Fed raised interest rates for the sixth time this year and raised interest rates by 75 basis points four times in a row.

In the early hours of November 3, the Fed announced that it would raise the target range for the federal funds rate by 75 basis points to between 3.75% and 4%. At the press conference, Fed Chairman Jerome Powell admitted to slowing rate hikes as early as December, but it was too early to pause rate hikes.

Affected by relevant news, European and American stock markets closed down across the board last night, and gold dived. In the domestic commodity market, domestic commodity futures closed today, with an overall decline and less gain. As of the close, manganese silicon rose by more than 4%, ferrosilicon rose by more than 3%, ethylene glycol, apple, etc. rose by more than 2%, NR, iron ore, etc. rose by more than 1%, and hot coils, crude oil, etc. rose slightly; Shanghai tin, rapeseed meal, etc. fell by more than 2%, Shanghai silver, corn, etc. fell by more than 1%, and Shanghai gold and Shanghai copper fell slightly.

Regarding the impact of the Fed's interest rate hike of 75bp this time, some insiders said that the overall impact of interest rate hikes on commodities is negative, and the downward risk sentiment caused by interest rate hikes is negative for commodities.

The overall impact is negative

The Fed's November interest rate meeting raised interest rates by 75bp as scheduled. Powell made a hawkish speech, the Fed is firmly committed to reducing inflation, and the terminal interest rate will be higher than previously expected.

In this regard, Shi Jialiang, a precious metals researcher at Founder Interim Research Institute, told the "International Finance News" reporter analysis, "On the whole, the Fed's November interest rate meeting showed a dovish and then hawkish tone, and Powell hedged the dovish signal of slowing down the time of interest rate hikes by raising the hawkish signal of the end level of interest rate hikes, and the overall transmission of the signal that the pace of interest rate hikes will be discussed in the future, the end of interest rate hikes is higher than expected, and the terminal interest rate will last longer." This has a bearish impact on financial and commodity markets, with the dollar index and U.S. bond yields remaining strong, U.S. stocks and precious metals remaining weak, and risk commodities being negatively impacted, and this impact will continue. Of course, the trend analysis of risk commodities should also be combined with their respective supply and demand fundamentals. ”

"The overall impact of interest rate hikes on commodities is negative, and the downward risk sentiment caused by interest rate hikes is negative for commodities." Lin Xinjie, an analyst at Shenyin Wanguo Futures, told reporters that "rising interest rates will inhibit investment and consumer demand, which in turn will affect the demand for upstream raw materials; The appreciation of the US dollar under the interest rate hike cycle has weighed on some internationally priced commodities; Under the background of raising interest rates to fight inflation, the market's long-term inflation expectations tend to be stable, and there will be no continuous upward movement of commodities under hyperinflation; Continued rate hikes would put the market in the possibility of a future recession, which in turn would depress commodity premiums. ”

Yingying Xia, director of metals at South China Futures Advisory Services, said, "Overall, after several large interest rate hikes of 75bp, the impact of this round of Fed interest rate hikes on bulk prices has weakened significantly from both time and space perspectives, and the market has fully anticipated, mainly reflected in short-term disturbances." ”

Xia Yingying further pointed out that in contrast, the impact of the Fed's interest rate decision on domestic commodities is more limited, and domestic bulk rebounded after a slight retreat from the opening of Thursday morning, and the overall trend is still based on domestic macro and its own fundamentals.

The auster environment will continue

Regarding the duration of the Fed's interest rate hike on the commodity market, Lin Xinjie analyzed to the "International Finance News" reporter that the Fed raised interest rates by 75bp this time and released signals that the pace of interest rate hikes will slow down in the future, but we note that Powell has directed market attention to higher terminal interest rates and longer interest rate hike cycles. Considering that the current inflation has not effectively fallen, the future interest rate path may be further steep than before (the neutral terminal rate is expected to be 4.6% at the September interest rate meeting), the interest rate hike cycle may continue longer, and the interest rate level will remain high next year, and the tightening environment will continue until the fourth quarter of next year.

Xia Yingying believes that the Fed's tightening of monetary policy is a continuous process, including not only the price tool for raising interest rates, but also the quantitative tool for reducing the balance sheet. According to the latest position of the Fed, the Fed will continue to raise interest rates during the year, and the high interest rate level is expected to continue until the end of 2023.

She further noted that "high interest rates are expected to continue to dampen economic activity, consumer demand and investment sentiment, thus creating a negative feedback on large commodities." At the same time, supply-side interference, rising energy costs and other factors also limit the room for valuation reduction, and we believe that commodities as a whole will remain in a weak volatility pattern. ”

Shi Jialiang analyzed, "It is expected that the Fed will slow down the pace of interest rate hikes in December, and the possibility of raising interest rates by 50BP is high, and in the first quarter of 2023, depending on inflation and economic performance, the interest rate will be raised again 1-2 times, and the terminal interest rate may be 4.75%-5%, and the terminal interest rate will continue until the fourth quarter of 2023." The strength of the U.S. index and U.S. Treasury yields will continue, and the high retreat may have to wait until the pace of policy adjustment slows in December. The impact of the Fed's accelerated tightening of monetary policy on commodities will also continue until the end of the year or the first quarter of 2023, and the influence is gradually weakening. Recession expectations continue to weigh on commodity movements, and the impact remains high until recession expectations materialize. Therefore, while the Fed's slowdown in interest rate hikes has a gradually weakening impact on commodities, it is necessary to focus on the subsequent impact of recession expectations on commodities. ”

Focus on structural opportunities

The impact of the Fed's interest rate hikes on commodity markets will continue, which commodity sectors are worth paying attention to in the short and medium to long term?

In this regard, Lin Xinjie told reporters that from the results, the meeting statement was in line with market expectations and released a marginal dovish signal, but Powell's speech showed the Fed's hawkish stance on a longer period. However, the Fed has limited room to raise the terminal interest rate further, and the marginal impact of raising interest rates in the short term is decreasing. "Considering that commodity-side demand will be squeezed by the sluggish impact of interest rate hikes in the future, some industrial products and base metals will face certain pressure, while the performance of agricultural products and energy commodities, which are currently more affected by micro factors, will be more resilient."

Shi Jialiang pointed out that the Fed accelerated the tightening of monetary policy to curb inflation from the demand side, but it also had a greater impact on the economy, coupled with the decline in US PMI, industrial index and other data, the US recession fears intensified, and it is more likely to fall into a recession in part of 2023, and the negative impact on commodities still exists. Therefore, under the continued tightening of policies and recession fears, commodities remain weak. There are few systemic opportunities in commodity markets, focusing on structural opportunities, and maintaining overall weakness; Investment strategies that hold a larger proportion of cash positions today are relatively safe.

In the precious metals sector, Shi Jialiang pointed out that the Fed's expectation of accelerating monetary policy tightening continues to heat up, the dollar index and U.S. bond yields remain strong, and London gold continues to maintain a weak operation below the key point. The market is concerned about whether macro factors such as the marginal change in the Fed's interest rate hike expectations, recession expectations and geopolitics can help gold return to the key point. In addition, from the perspective of the seasonal performance of precious metals in the past ten years, London gold and London silver are now weak in November, especially London silver has shown a decline in November in the past 10 years, and the performance in December is strong, paying attention to the impact of seasonal performance on the trend of precious metals.

In terms of non-ferrous sectors, Shi Jialiang said that under the accelerated tightening of policies and economic recession concerns, the non-ferrous sectors represented by copper and aluminum will still maintain a weak trend, but because the supply side is relatively tight and low inventories provide price support, the speed of decline and the space below are relatively limited. Crude oil prices are still running at a high level due to factors such as energy crisis and OPEC+ production cuts, and the energy sector is relatively strong due to crude oil prices still maintaining a high level, but the probability of future downward movement is still large. The black building materials sector needs to continue to pay attention to the performance of the real estate market.

In addition, on the issue of investment strategy, Bian Shuyang, an agricultural product analyst at the South China Futures Advisory Service Department, said in an interview with the International Finance News, "In the short term, before this round of interest rate hikes, commodities have fallen a wave, and they have been falling throughout October, and the current difficulty of falling has increased." Therefore, it is not advisable to go short further in the short term, you can choose some varieties with low valuations to do more, such as energy and black varieties whose profits have reached the cost line or lower, and you can choose oils and apples in agricultural products. In the long run, due to the poor economic environment, it is more difficult for the commodity market to rise sharply, and after the end of the current round of rebound, it is still necessary to find some varieties for high-altitude short operation. ”

This article is from Zhenji Fengyun