Commodity markets cautiously await next week’s US labour report

Kaynat Chainwala

Market sentiment improved in the final session of May as investors found solace in lower inflation readings, helping most risky assets conclude the month on a positive trajectory.

The dollar index slid to a two-week low of 104.38 and closed May approximately 1.5 percent lower, marking its first monthly decline in 2024, following the release of US PCE figures. Key inflation indicators slowed in April, suggesting progress, albeit gradual, towards the Fed’s inflation target.

PCE inflation stood at 2.7 percent on an annual basis, increasing by 0.3 percent from the previous month, while core PCE rose 0.2 percent month-on-month (MoM) and 2.8 percent year-on-year (YoY), aligning with forecasts. US equities, which had faltered after the first-quarter US GDP figures were revised down and jobless claims edged up, regained momentum on the easing of the Fed’s preferred inflation measure. This helped major US benchmark indices post a positive month, although the S&P 500, Nasdaq, and Dow Jones were still on track for a roughly 2 percent weekly decline.

COMEX Gold prices closed the week (ending May 31) flat after a nearly 3.5 percent decline the previous week, as better-than-expected US data and hawkish Fed rhetoric countered safe-haven demand due to geopolitical risks in the Middle East. Interest rate swaps are now pricing in only one rate cut this year, during Q4 2024. Silver closed  at $30.44 per troy ounce, retreating sharply from $32.5 troy ounce.

WTI crude attempted a recovery earlier in the week, approaching $80 per barrel, buoyed by escalating tensions in the Middle East and hopes of a demand uptick with the start of the summer driving season. However, a rise in refined product inventories and caution ahead of the OPEC+ meeting on Sunday pushed oil prices lower towards $77 per barrel.

On the daily charts, MCX Crude Oil June futures formed an Evening Star pattern between May 28 to 30, 2024. The high of this pattern, Rs 6,728 per barrel, is now a crucial resistance. Furthermore, the counter is consolidating within a Broadening Triangle pattern (formed since May 8, 2024), which commonly denotes a sideways trajectory. The low of the Broadening Triangle, at Rs 6,345 per barrel, is now a substantial support, breaching which may compel prices to test the next base situated at Rs 6,200 per barrel. The MCX Crude Oil June futures is expected to be sideways-to-bearish for the next week.

LME base metals gained momentum on the easing of housing curbs in three major Chinese cities — Shanghai, Shenzhen, and Guangzhou — and hopes that more cities may follow through on the Chinese central government’s pledge to aid the struggling property sector.

However, prices pulled back  sharply amid concerns of delayed rate cuts  and an unexpected contraction in China’s manufacturing activity in May, after two months of expansion. Aluminium was the only gainer in the metals pack as China’s limits on production, in order to achieve their energy conservation and carbon reduction goals for 2024-25, pushed the light metal to a two-year high of $2,798 per tonne.

A pullback across risky assets was observed on Friday as the PCE figures did not significantly alter the rate cut guidance, considering that price pressures remain elevated and significantly above the Fed’s 2 percent target. Swap contracts imply a total rate reduction of 34 basis points (bps)  for all of 2024, up slightly from Thursday. Next week, the US labour report will take centrestage as the markets cautiously wait to see whether the slow hiring in April was seasonal or more enduring. Any unexpected tightening of the job market would shift the scales in favour of higher rates for longer, while moderation may allow the Fed to cut interest rates sooner rather than later.

The European Central Bank’s (ECB’s) monetary policy will also be closely monitored as Philip Lane, the bank’s Chief Economist, has spoken of a possible rate cut in its upcoming meeting, making it one of the first major central banks to make a policy shift.

The author is AVP, Commodity Research, at Kotak Securities.

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