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Commodities Week Ahead: Inflation Check on Oil, Gold Bulls at Half-Year Mark

Published 06/26/2023, 04:53 AM
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  • Higher inflation suggests economy is working for oil
  • Gold as an inflation hedge holds up in higher-price environment
  • But central banks, from Fed to BoE and ECB, stand by with rate hike tool
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  • Oil and gold are at a crossroads again as the half-year mark approaches.

    Inflation higher than desired by the US to European authorities suggests that economies on both sides of the Atlantic are chugging along just fine to keep oil demand alive. Higher inflation also keeps alive hedging in gold.

    But with central banks from the Fed to the BoE and ECB eyeing more rate hikes, the US dollar, and US Treasury yields could see fresh spikes at the mid-year point, weighing on gold and oil.

    On Friday, investors will get a fresh update on the possible future path of interest rates with the release of May data on the PCE price index, the Federal Reserve’s preferred inflation gauge.

    Inflation Is the Word

    In the 12 months through April, the PCE price index and the core rate were still running well above the Fed’s 2% target.

    The inflation numbers will feed into investor expectations around the Fed’s next rate decision in July after the central bank paused tightening at its June meeting but signaled more hikes ahead. Before that, the latest consumer confidence report is due Tuesday after the index hit a six-month low in May. June's index is expected to tick higher.

    On Friday, the eurozone will release preliminary inflation data for June. And while the headline rate of inflation is expected to moderate, underlying inflation is expected to tick higher, underlining the challenge facing the ECB.

    ECB President Christine Lagarde struck a more hawkish tone than expected following the bank's most recent policy meeting, reiterating that rates would need to be increased again to bring inflation down to the ECB's 2% target and that they "will be kept at those levels for as long as necessary."

    Traders are now betting on a July hike by the ECB and expect another hike by October.

    On Wednesday, investors will get a chance to hear from Lagarde, along with Fed Chair Jerome Powell and other global central bank heads, at a panel discussion at the ECB’s annual forum in Sintra, Portugal. Inflation is likely to be front and center during that exchange.

    The year started with a burst of optimism over China's post-COVID recovery, greater resilience in the global economy, and relief that inflation could have peaked. Since then, a US banking crisis, the collapse of Credit Suisse, and the struggle to rein in inflation have made the last six months feel like a long time in markets.

    All these have put the dollar in contention with gold for safe-haven seekers.

    Gold Hanging In There

    As Ed Moya, an analyst at online trading platform OANDA, said in a commentary on Friday:

    “The dollar has been rallying on strong demand for Treasuries as investors worry about the global growth outlook. After tumbling to the $1,920 level, gold is starting to attract safe-haven flows as the stock market selloff intensifies.”

    The front-month August gold contract on New York’s Comex hovered at just above $1,935 an ounce in Monday’s Asian session, up 0.4% on the day. In Friday’s trade, August gold reached a three-month low of $1,919.85. Also, last week, the benchmark gold futures contract experienced its biggest weekly swoon since January, sliding 2%.

    The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, was at $1,925 after Friday’s three-month low of $1,910.24.

    For June thus far, gold is down 2.6% after a 1.8% slide for May. Notwithstanding that, gold is still up more than 5% YTD.

    Oil Wedged Between China Data and Inflation

    On the oil front, economic data out of China will also be in the spotlight as the recovery in the world’s number two economy falters. Events in Russia will also be closely watched after an attempted insurrection challenging President Vladimir Putin's grip on power was averted.

    China is to release purchasing manager indexes for June on Friday, with the data expected to add to the narrative that the recovery in the world’s second-largest economy is losing momentum.

    China cut its key lending benchmarks last week as authorities attempted to shore up growth, but concerns about the property market meant the easing was not as large as expected.

    Bad news could be a positive if traders see it as a way of pushing authorities to offer more support to the economy - as long as it eventually arrives. But if hopes are running high, patience is wearing thin: Several global investment banks cut their 2023 gross domestic product growth forecasts for China after May economic data missed forecasts.

    New York-traded West Texas Intermediate, or WTI, crude hovered above $69 a barrel in Monday’s Asian session after a 3-week low of $67.36 on Friday. The US crude benchmark finished last week down 3.7%.

    London-traded Brent crude hovered above $74 after a three-week low of $72.12 on Friday. For all of last week, the global crude benchmark was off about 4%.

    Goldman Sachs analysts said markets might price a moderately higher probability that domestic volatility in Russia leads to supply disruptions. However, the analysts added that the impact may be limited because spot fundamentals have not changed.

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    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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