Commodity markets in the red last week as early Fed interest rate cut hopes fade

By Burhan Sansarlioglu

ISTANBUL (AA) - Commodity markets lost gains from the previous week as markets postponed expectations for the US Federal Reserve's first interest rate cut in 2024 and amid news of a potential cease-fire between Israel and Palestinian resistance group Hamas.

The Fed kept its policy rate unchanged, in line with expectations, at a 23-year high of 5.25-5.50% after a two-day Federal Open Market Committee (FOMC) conference.

In a recent statement, the Fed said recent indicators suggest economic activity is expanding steadily, adding that employment gains have slowed since early last year but remain strong.

Following the policy decisions, Fed Chairman Jerome Powell said more evidence would be needed to have confidence that inflation is sustainably falling, adding that the policy rate is likely at its peak and that it would be appropriate to start rate cuts this year if the US economy performs as expected.

Powell argued that it was unlikely that this level of confidence needed for a rate cut would be reached by March.

The possibility that the Fed may start cutting policy rates later than expected has had an impact on commodity prices, analysts say.

Macroeconomic data in the US continue to give mixed signals, as nonfarm payrolls increased by 353,000 in January, exceeding market expectations, while the unemployment rate was below forecasts, remaining unchanged at 3.7%.

Average hourly earnings, monitored by the Fed, went up 0.6% in the same period, above market expectations, to $34.55, the largest increase since March 2022.

Analysts state that the data indicating that the labor market remains strong suggests that expectations of a recession in the US economy have declined, making it more likely that the Fed will start cutting interest rates later than expected.

Market pricing suggests a 20% likelihood that the Fed will begin interest rate cuts in March, while there is a forecast of a 68% probability that it will commence rate cuts at the May meeting.

- Gold on rise despite precious metals decline

Analysts noted that after the Fed’s decision not to change its policy rate, Powell's statements that the interest rate has peaked and will not go up further impacted the ounce price of gold.

Meanwhile, companies producing platinum estimate a decline in profits due to falling prices of the metal.

In light of these news, the price of an ounce of gold gained 1% last week, while silver lost 0.5%, platinum 2.2%, and palladium 0.6%.

Base metals saw declines due to concerns that weak economic data from China would affect the demand outlook, as well as the fall in expectations for Fed interest rate cuts.

Analysts noted that high interest rates, stagnation in manufacturing activity in Western economies, and ongoing issues in the Chinese economy could lead to a reduction in demand for base metals in the future.

Leading economic activity data in the manufacturing industry of China indicated that the contraction in the sector, which started in the fourth quarter of 2023, is still ongoing.

The Purchasing Managers’ Index (PMI) for manufacturing was at 49.2 in January, below the growth threshold of 50 points, according to data released by the National Bureau of Statistics of China.

The data was released after the decision to liquidate Evergrande, a debt-stricken real estate company in the country.

Experts highlight that the steps taken by Beijing in recent weeks to support the economy are needed to propel it into an expected growth trend.

The projected slowdown in manufacturing output due to the Chinese New Year on Feb. 10 could further dampen demand for base metals, analysts note.

Given these changes, copper saw a decrease of 0.8%, lead 0.1%, aluminum 1.1%, nickel 2.6%, and zinc 5.1% last week.

Also, oil prices declined due to news that Israel and Hamas are close to agreeing on a cease-fire.

Predictions of rising temperatures leading to decreased natural gas demand, along with forecasts of above-average natural gas storage levels, also contributed to the drop in natural gas prices.

In light of these changes, Brent crude oil fell 7.2%, and natural gas traded on the New York Mercantile Exchange plummeted 22.9%.

- Decline in prices of corn, soybean steal spotlight in agricultural group

Increased demand expectations due to the rise in weekly wheat exports in the US led to an uptick in prices.

Global corn production estimates went up month-on-month, leading to a decline in prices, while increased corn deliveries in the US pushed corn prices down.

Concerns about drought affecting rice harvests in Indonesia drove rice prices up. Decreases in global rice production estimates also contributed to price increases.

Soybean prices went down amid concerns about reduced demand in China due to issues in the country's economy.

Given these reports in the agricultural group, the price of wheat traded on the Chicago Mercantile Exchange slipped 0.3%, corn 0.8%, and soybeans 1.8%, whereas the price of rice gained 2.5% last week.

Corn was traded at $4.3650 and soybeans at $1,186.75, which were the lowest levels since December 2020.

Continued forecasts of reduced sugar production in India propelled sugar prices into their fifth consecutive week of increases.

Cocoa prices continue to hit new peaks due to the threat posed by the Harmattan winds in West Africa and the ongoing low volume of cocoa arriving at ports for delivery.

​​​​​​​In the coffee market, expectations of a surplus in production, coupled with easing concerns about supply, led to price declines.

Coffee deliveries in Vietnam soared 48% year-on-year, according to data from the General Statistics Office of Vietnam.

Brazilian coffee exporter Comexim raised its production forecast for the 2023-2024 season from 41.5 million bags to 44.9 million.

The International Coffee Organization (ICO) estimates a production surplus of 1 million bags in the same period.

In light of these developments, cotton traded on the Intercontinental Exchange gained 2.5%, sugar 0.7%, cocoa 7.6%, renewing its peak at $5,032 per ton, while coffee decreased 1.4%.

*Writing by Emir Yildirim