U.S. inflation exceeded expectations, and the likelihood of a "soft landing" decreased
At 8:30 p.m. Beijing time on April 10, the U.S. Bureau of Labor Statistics released U.S. inflation data for March. According to the data, the US CPI in March increased by 3.5% year-on-year and 0.4% month-on-month, of which the year-on-year growth hit a new high since October last year. In addition, the core CPI increased by 3.8% year-on-year and 0.4% month-on-month. Overall, both the CPI and the core CPI excluding food and energy exceeded market expectations by 0.1 percentage points, and the seasonally adjusted month-on-month growth rate of both was 0.4%, which also exceeded market expectations.
Since the beginning of this year, inflation in the United States has risen for three consecutive months from the previous month, and the reason for its resilience is that in addition to energy items and housing, the sharp rise in the price of its services has also contributed a lot. According to the data, the US energy CPI increased by 1.1% month-on-month in March, of which gasoline increased by 1.7% month-on-month, which was the main driving factor. The rise in gasoline prices was mainly affected by geopolitical tensions and previous market expectations of interest rate cuts, taking the spot price of Brent crude oil as an example, it rose to $81.91/barrel on March 1, rose to $87/barrel on March 29, and exceeded the $90 mark on April 8. In terms of housing, the cost of housing in the United States rose 0.4% in March from February and increased by 5.7% year-on-year, which remained at a high level. In addition, service prices (excluding energy services) also came to a higher level, with the US service price CPI increasing by 5.4% year-on-year in March, of which shelter and transportation services increased by 5.6% and 10.7% year-on-year, respectively. It is worth mentioning that the Fed's previous dovish attitude has also added fuel to inflation, for example, the rise in the price of crude oil, in addition to the impact of the geopolitical situation, the influx of funds into commodities affected by the expectation of interest rate cuts is also a more important lifting factor.
The U.S. economy remains resilient at this stage, as evidenced by the recent U.S. Department of Labor employment data, in addition to inflation data. According to the data, the number of non-farm payrolls in the United States increased by 303,000 in March, far exceeding market expectations of 200,000, and the unemployment rate was 3.8%, down 0.1 percentage points from the previous month. And this also shows that you can't have both fish and bear's paws, and the possibility of a "soft landing" is also decreasing.
The market expects the rate cut to be postponed to September, and the number of rate cuts is expected to be no more than two
The current market expectation of a Fed rate cut is constantly being postponed. Due to the downward trend in inflation at the beginning of this year and the more "dovish" behavior of Fed officials, the market expected to start cutting interest rates in March this year, and cut rates six times (25 basis points each time) during the year. With inflation rising in February, the market delayed the Fed's rate cut until June, and it is expected that there will be no more than three rate cuts this year.
After the release of the US inflation data for March, the market's expectations for the Fed's interest rate cut were postponed again. According to CME Group data, traders on Wall Street have now pushed back their expectations for rate cuts until September, and they expect no more than two rate cuts. Economists at Barclays are more pessimistic, expecting only one rate cut this year. At present, the probability of a rate cut in June is less than 20%, and the market's hopes for a short-term rate cut are basically dashed. As a result, markets reacted quickly after the release of the data, such as the 10-year Treasury yield and the U.S. dollar index starting to rise, while U.S. stock futures and gold prices began to retreat slightly.
Where do commodities go from here?
Previously, the Federal Reserve is expected to cut interest rates, the geopolitical situation, the macroeconomic and other influences, most of the commodities represented by gold, crude oil, copper, etc. have ushered in the rise of nearly three months, especially gold has risen by more than 2,300 US dollars / ounce. And with hopes of a near-term Fed rate cut dashed, where do these recent bright commodities go from here?
(1) Gold may perform volatile in the short term, but the price support is sufficient, and it is still expected to carry out a new round of rise in the long term
Unlike other commodities, gold, as a precious metal, not only has monetary properties, but also has special hedging properties. First of all, the current geopolitical situation in the world is still relatively turbulent, and some funds have an obvious trend of hedging risk, so in the current situation, geopolitical tensions still provide support for gold prices in the near future.
Secondly, investors are not all of the recent large purchases of gold, and global central banks are also the main allocation force. Taking the mainland as an example, according to the latest data from the central bank, the pace of China's central bank holdings remained basically stable against the backdrop of higher international gold prices, with gold reserves of 72.74 million ounces at the end of March, an increase of 160,000 ounces from the end of February. This is the 17th consecutive month since October 2022 that the PBOC has increased its holdings of gold reserves. Therefore, under the "crazy buying" of global central banks, the current gold price is showing a trend of rising with US bond yields and the US dollar, which is obviously the opposite of before. Overall, under the influence of the global central bank's increasing allocation of gold, gold is "desensitizing" with U.S. interest rates, which hedges the impact of U.S. inflation to a certain extent, and also increases market confidence, resulting in this relatively strong support for gold prices.
Finally, the Fed's rate cut is expected to be delayed, and the market is still unanimous that the US will cut rates this year. Although it was previously mentioned that gold is being "desensitized" to the US dollar, the US interest rate will still have a certain impact on gold trading at this stage. As a result, Bank of America expects gold prices to jump to $3,000 an ounce by 2025, and investors will return to gold market expectations once the Fed starts cutting interest rates, in addition to strong demand from major central banks.
Overall, gold prices may fluctuate in the short term due to inflation data, but gold still has a high support level due to the impact of the geopolitical situation and the continuous allocation of global central banks. In the long run, future Fed rate cuts are still expected to provide a new round of upside for gold.
(2) Crude oil is facing a tightening of supply and demand in the short term, and oil prices may fluctuate
At present, the most important factor affecting the price of crude oil is still supply and demand. From a supply-side perspective, the escalation of geopolitical tensions and OPEC+ production cuts will still tighten crude oil supply. On April 1, Iran identified Israel as the perpetrator and vowed to "punish it" after a missile attack on the consular building of the Iranian embassy in Syria. This has directly escalated the situation in the Middle East, and CNN also expressed that this may be the most dangerous escalation outside Gaza since the new round of the Palestinian-Israeli conflict. Many countries are now advising their citizens not to travel to the Middle East. The escalation of the situation in the Middle East has raised concerns about the future supply of crude oil, which has been the main factor in the recent rise in oil prices. In addition, OPEC+'s production cuts are also continuing to affect crude oil supply, whether it is OPEC members' production cuts that have been extended until June or Russia's larger-than-expected production cuts in recent times, which have directly locked in the world's crude oil supply. Overall, the overall tightening of the supply side is difficult to change in the short term, and the driving factors that boost oil prices are still there.
On the demand side, the U.S. Energy Information Administration (EIA) said it lowered its forecast for global crude oil demand. In its short-term energy outlook report, it lowered its forecast for global oil demand growth by 480,000 b/d to 950,000 b/d in 2024 and 30,000 b/d to 1.35 million b/d in 2025. The report also shows that U.S. crude oil imports and refinery equipment utilization have both declined month-on-month recently. Therefore, in the short term, the demand side of crude oil may be tight, which has become a downward factor in oil prices. In addition, the postponement of U.S. interest rate cut expectations has also caused some market funds to leave crude oil.
Overall, crude oil may face a tight supply and demand situation, and oil prices are difficult to rise sharply due to the impact of tightening demand and the expected postponement of interest rate cuts, but at the same time, it is difficult to have a large decline due to the impact of tight supply. Therefore, short-term oil prices may be biased towards a volatile trend, and breaking this equilibrium may require a breakthrough at one point in the supply and demand factors. In the long run, according to the previous International Energy Agency, China's economic recovery this year is expected to boost global crude oil demand, and under the influence of this, coupled with the subsequent U.S. interest rate cut, oil prices still have room to rise due to the impact of demand.
(3) Affected by supply and demand, copper prices have a strong logic of rising, but it is still necessary to be vigilant against the risk of being "replaced".
Copper's rise in this rally is mainly due to the tough logic of supply and demand, and it is less affected by interest rate cuts. First of all, on the supply side, copper mine production cuts have become an established fact, such as the production reduction of Escondida, one of the largest copper mines, and the cessation of operations of the Cobre copper mine, etc., and the tightening of the supply side has directly raised the price of copper. In addition, the rise in copper prices has also led to a sharp decline in the profits of the mainland copper concentrate smelting, and they have chosen to reduce production in response to the huge losses borne by copper concentrate smelters. As the mainland is the world's largest copper smelter producer and copper consumer, copper prices have been further raised for the first time.
Secondly, on the demand side, on the one hand, because the International Monetary Fund (IMF) raised its global economic growth forecast for this year, which led to an increase in copper demand expectations. On the other hand, as a key basic raw material for the transmission of renewable energy, especially in the application field of new energy vehicles, the value of copper is particularly prominent. Therefore, at the current stage of the continuous development of global new energy, the demand side of copper is full of resilience.
Overall, there is still room for copper prices to rise due to the supply and demand of copper. Wall Street banks generally continue to be bullish on copper prices this year, saying that the surge in copper prices shows no signs of slowing down, and that supply risks and an improved outlook for energy transition demand continue to drive the metal's rally. Citibank analyst Maximilian J Layton said copper prices are expected to reach $10,000/t by the end of the year and climb to $12,000/t in 2026. Although the market is extremely optimistic about copper prices, if copper prices move too high, it is still necessary to be vigilant against risks. Colin Hamilton, a commodities analyst at BMO Capital Markets, said that if copper is four times the price of aluminum, the market will look for an "alternative" to copper. (The article only represents the author's personal views and is not intended as investment advice) (This article was first published in Titanium Media APP, author|Gu Shuo, editor|Liu Yangxue)