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Commodities Slip, Markets Brace for Data Deluge and Fed Signals

2 months ago

Brent crude oil prices edged lower towards $81 a barrel following a more than 2% decline last week, while its U.S. counterpart West Texas Intermediate hovered above $76. Concurrently, gold saw slight losses, and iron ore dropped to its lowest level since October, echoing last week’s nearly 9% slump. Hopes for a resurgence in Chinese steel demand post-Lunar New Year holidays are waning, influencing commodity markets.

The trajectory of U.S. inflation data will be pivotal in shaping expectations regarding the Federal Reserve’s timeline for interest rate adjustments, thereby impacting energy demand and the trajectory of the dollar. Against this backdrop, Asian stocks, alongside European and U.S. equity futures, faced declines as investors prepared for a data-rich week, including updates on Chinese activity gauges and the Federal Reserve’s preferred inflation measure.

In the coming days, investors are gearing up for the repercussions of heavy Treasury and corporate issuances, coupled with month-end positioning adjustments. Economic data releases, notably the core personal consumption expenditures (PCE) price index on Thursday, will be closely scrutinized. Both headline and core PCE are anticipated to show a robust 0.4% month-over-month increase, largely driven by residual seasonality. Despite the elevated monthly figures, base effects are expected to moderate annual core inflation to 2.8% in January (versus 2.9% previously), with a continued downward trend to 2.5% or lower by mid-year, supporting the baseline expectation for the first Fed rate cut in May.

A series of speeches from Federal Reserve officials throughout the week are likely to echo sentiments that the economy remains on track, with a possible rate cut later in the year deemed appropriate. However, the central bank appears unfazed by immediate pressure to initiate rate cuts.

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