Commodity Markets Seek Supportive Data Next Week to Bolster Fed Rate Cut Expectations for September

Markets closed the week ending July 5 on an optimistic note as signs of a slowdown in the US economy increased prospects for Federal Reserve rate cuts.

The dollar remained well-supported above 105 levels earlier in the week, buoyed by somewhat dovish commentary from Fed Chair Jerome Powell and simmering tensions in the Middle East. Powell acknowledged progress in curbing inflation but emphasized the need for more evidence before lowering interest rates. This, combined with an unexpected increase in US JOLTs Job Openings in May, pushed the greenback to a two-month high of 106 levels. However, the dollar pulled back and closed at a seven-week low of 104.88 after the official jobs report indicated a steady slowdown in the labor market.

Data from the Bureau of Labor Statistics showed the US economy added 206,000 non-farm payroll jobs in June, surpassing the Bloomberg estimate of 190,000. However, job growth in the prior two months was revised down by 111,000. Additionally, the unemployment rate ticked up to 4.1%, the highest since November 2021, and wage inflation continued to cool with average hourly earnings rising 3.9% in June from a year ago, marking the smallest annual advance in three years.

Overall, the report confirmed a moderation in US labor markets and raised the odds of a September Fed rate cut, lifting the S&P 500 and Dow Jones to record highs and pushing COMEX Gold above $2,400 per troy ounce for the first time since early June. According to CME’s FedWatch Tool, futures markets are now pricing in a 72% chance for a 25 bps rate cut at the Fed’s meeting in September, up from a 57.9% chance a week ago. Silver also rallied by 6.5% this week, in line with sharp gains in both gold and base metals.

MCX Gold (Aug), on the four-hourly chart, has given an upward breakout of its ‘Cup & Handle’ chart pattern, confirming an upward bias. Additionally, RSI (14) is hovering around 74.80 levels, indicating the dominance of bulls. The next resistance for the counter is placed at Rs 73,550 per 10 grams, with major resistance at Rs 74,000.

LME base metals closed the week higher, led by copper with nearly 4% gains, as Fed rate cut optimism outweighed concerns about a patchy recovery in China. WTI Crude oil hit $84.52 per barrel, the highest since late April, buoyed by concerns of a severe storm season, the largest inventory drawdown in over a year, and escalating geopolitical tensions. Oil is set for more gains as the Lebanese Hezbollah group launched over 200 rockets on Thursday at several military bases in Israel in retaliation for an attack that killed one of its senior commanders.

Following the release of official jobs data, markets are now awaiting more supportive data to solidify expectations for a September rate cut, starting with US inflation figures next week. US CPI is expected to rise by 0.1% after remaining unchanged in May, while Core CPI is expected to hold steady at 0.2%. A larger-than-expected increase could prompt investors to reconsider the likelihood of a Fed rate cut, while a negative surprise could bolster market confidence further. Fed Chair Powell’s testimony will be closely watched, although he is unlikely to provide hints on the monetary policy outlook. Additionally, Chinese CPI is expected to improve to 0.4% in June, following stagnant price growth at 0.3% in April and May, while PPI deflation is projected to narrow further to 0.8%. If both indicators meet these estimates, it would indicate an improvement in domestic demand.

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