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Commodities Week Ahead: Fed, U.S. Jobs Data Add to Oil, Gold Twist

Published 01/05/2023, 09:48
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  • The potential for a tenth Fed rate hike weighs across markets
  • US jobs data forecast to be weaker but could again surprise to upside
  • If dollar spurts on the combination of the two, oil and gold will be pressured
  • The likelihood of a tenth Fed rate hike and more-resilient-than-thought US jobs data could again prove to be the undoing of oil and gold bulls.

    Wednesday’s Federal Reserve decision is set to be the highlight of the week, with the central bank expected to announce another quarter-point rate hike.

    On the jobs front, the United States is to release the April employment report on Friday, which is expected to show the economy added 180,000 jobs. But if jobs growth again exceeds 200,000, it’ll be a sign the US consumer is still resilient and will continue spending, and the Fed needs more rate hikes to contain inflation.

    In such a setting, the dollar will likely spurt again, posing fresh headwinds for oil and gold.

    New York-traded West Texas Intermediate, or WTI, for June delivery, was down 65 cents, or 0.9%, to $76.13 per barrel by 00:45 ET (04:45 GMT), adding to last week’s slide of 1.9%.

    Technically, WTI will have to head towards $80 per barrel to regain momentum on the upside, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

    “As such, going forth, any further bullish rebound will have to clear through the challenge of $79.30, which may open the door for the 200-day Simple Moving Average, or SMA, of $81.80, followed by the 50-week Exponential Moving Average, or EMA, at $82.20,” said Dixit. “Major resistance will be at $85.10.”

    On the flip side, he cautioned that WTI’s failure to progress beyond $79.30 would likely cause a renewed decline towards $74, below which sits the confluence zone of the 200-month SMA of $72.80 and the 50-month EMA of $72.20.

    “At this point, major support is seen at the 200-week SMA of $66.80 and the 100-month SMA of $60,” he added.

    London-traded Brent for July delivery was down 58 cents, or 0.7%, to $79.95, extending last week's 0.7% drop.

    Adding to the consternation of commodity bulls was China’s manufacturing purchasing managers’ index, or PMI, which declined to 49.2 from 51.9 in March. The slide below the 50-point mark separates expansion and contraction in activity on a monthly basis.

    Factory activity in No. 3 economy Japan, meanwhile, contracted for a sixth straight month in April, although the manufacturing sector edged towards stabilization with a slower decline in new orders.

    The US economic calendar for this week also features March data on job openings, initial jobless claims (which are starting to edge higher), and ISM surveys of purchasing managers in the manufacturing and services sectors for April.

    Analysts at ANZ Research said in a note:

    “Investors remain cautious amid mixed economic signals. Brent crude has been tracking broader markets in recent sessions, with a slew of economic data creating more uncertainty about the outlook. A hawkish tone from the Fed could put pressure on energy and metals.”

    The Fed is expected to raise interest rates by another 25 basis points on Wednesday against a background of still persistent inflation and growing concerns over the economic outlook.

    It would be the tenth straight rate hike in a row, bringing the benchmark to between 5% and 5.25%, its highest level since 2007. While price pressures are cooling, inflation is still well above the Fed’s annual target of 2%.

    Fed officials and markets remain at odds over the future path of interest rates, with the central bank expecting interest rates to remain around current levels through 2023 and investors betting on rate cuts before the year’s end.

    To fight inflation, the Fed has added 475 basis points to rates in nine increases since March 2022. Rates now stand at a peak of 5%, compared with just 0.25% at the start of the coronavirus pandemic in March 2020. Another quarter-point hike, anticipated on May 3, will bump up rates to a peak of 5.25%.

    Despite that, given renewed signs of stress in the US banking sector in recent days, with problems at First Republic Bank, some think Fed officials may signal a pause in June.

    Fed policymakers have indicated that the tighter credit conditions could act like an additional rate hike, possibly reducing the number of hikes necessary to bring inflation back down to its target.

    US data of late has reinforced investor worries about a slowing economy.

    The Commerce Department reported on Thursday that real gross domestic product, or GDP, grew at an annual rate of 1.1% in the first quarter of 2023 versus the 2.6% expansion in the fourth quarter of 2022. Economists tracked by Investing.com had expected a GDP growth of 2% for the first quarter.

    US jobless claims, meanwhile, fell unexpectedly by 16,000 last week to reach 230,000, the Labor Department reported in what would be another challenge to the Federal Reserve, which needs unemployment numbers to rise to effectively fight inflation.

    A consensus of economists had expected initial jobless claims to rise to 248,000 from the previous week’s revised level of 246,000. The drop reported by the Labor Department instead meant more inflationary pressure for the Fed to contend with.

    Inflation itself, as measured by the Fed’s favorite price indicator — the Personal Consumption Expenditure, or PCE, Index — grew by just 4.2% in the year to March this year from a four-decade high of 6.6% in the 12 months to March 2022.

    Despite the cooling in prices, annual inflation remains at more than double the Fed’s 2% target. The central bank has, thus, embraced rate hikes as the only proven way to fight the upward trajectory in prices.

    Analysts said gold might not benefit too much from safe-haven plays related to the ongoing US banking crisis though it could surge “if the Fed is comfortable enough to signal they are reading to hold rates for a while.”

    Added Ed Moya, an analyst at online trading platform OANDA:

    “Monetary policy is restrictive, and as it filters through the system, we will start to see larger parts of the economy enter slowdown mode.”

    Gold for June delivery was at $1,991.40 per ounce by 00:45 ET (04:45 GMT), down $7.70, or 0.4%. The session low was $1,989.50.

    The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, was at $1,982.89, down $7.17, or 0.4%.

    ***

    Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

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