Commodities Week Ahead: Investors On Tenterhooks Ahead Of CPI Data

• CPI reading due in China on Tuesday, in the US on Thursday
• China reiterates commitment to COVID-zero approach
• US CPI could give timeline on Fed rate pivot
• Weak number could signal recession

From the United States to China, inflation concerns rule as investors remain on tenterhooks over Consumer Price Index (CPI) data this week that will indicate how serious the threat of recession is.

Crude prices tumbled at Monday’s open in Asia ​​after Chinese officials at the weekend reiterated their commitment to a strict COVID containment approach, dashing hopes of an oil demand rebound in the world's top crude importer.

Beijing is to release CPI data on Tuesday after trade numbers at the weekend showed the first annual decline in Chinese exports since May 2020. Exports fell by 0.3% and imports also fell by 0.7%—a Reuters poll had forecast a rise of 4.3% and 0.1%, respectively.

Futures of New York-traded West Texas Texas Intermediate (WTI) crude surged 5% on Friday to a 9-week high of $92.81 while London-traded Brent reached $98.74 on speculation that China may ease up on COVID lockdowns.

In Monday’s Asian trade, however, WTI hit a session low of $90.53 while Brent fell to $96.50.

ANZ analysts said in a note that demand for oil in Europe and the United States has fallen back to 2019 levels, after reaching new post-pandemic highs over the past year, adding:

“The market is still dealing with signs of weakness in oil demand from already high prices and the weak economic backdrop in developed markets."

“We now expect global demand in Q4 2022 to grow by only 0.6 mb/d (millions of barrels per day) from the same quarter last year and to moderate next year."

On Friday, China will also release data on new loans growth that are expected to point to ongoing weakness in the world’s second-largest economy as COVID curbs sap demand.

That aside, Beijing released data on foreign exchange reserves, which are being depleted as authorities seek to shore up the yuan which is on track for its worst year since 1994. China's foreign currency reserves are within a whisker of the psychological $3 trillion level amid broad-based dollar strength since the Fed began raising rates in March.

Perhaps more important than the Chinese data will be what surfaces as the US CPI number for October.

The US inflation data, due Thursday, could bring insight into when the Federal Reserve might start to slow the pace of rate hikes. Economists are expecting the annual US CPI rate to come in at 8.0% and the monthly rate at 0.6%.

Market watchers will be on the lookout for indications that price pressures are cooling after a barrage of outsize rate hikes by the Fed.

Since March, the Fed has raised interest rates six times in a bid to contain inflation, with four jumbo-sized hikes of 75 basis points (bp) from June onwards that brought rates to a peak of 400 bp from just 25 in March.

Fed Chair Jerome Powell said last week that policymakers will likely take rates higher than envisioned in their attempt to curb soaring inflation. Powell stressed on the “need to bring our policy stance down to a level that's sufficiently restrictive to bring inflation down to the 2% objective over the medium term.”

The question is what is “restrictive” here? Chicago Fed President Charles Evans suggested on Friday that even a 50 bp hike could be a deterrent, versus the 75 bp that policy-makers have become accustomed to.

“From here on out on rate hikes, it's not front-loading anymore,” Evans said.

“Even with smaller rate hikes, there is ample room to tighten monetary policy.”

The Fed’s target for inflation is just 2% per annum. But US-based CPI has been expanding four times faster—growing 8.2% during the year to September, after a 40-year peak of 9.1% in the 12 months to June.

Expectations that the Fed could still resort to a rate pivot—despite countless back and forths on this—was one factor cited for oil’s upside on Friday.

US jobs numbers overshot forecasts again in October but the hedge funds that typically send the dollar rallying on that chose this time to hammer the greenback—handing a win to oil and the rest of the commodities complex.

But a cooler-than-expected reading could see markets become more focused on the higher probability of a recession.

The outcome of the US midterm elections on Tuesday, where control of Congress and President Joseph Biden's agenda for the remaining two years of his term are at stake, will also be in focus.

Republicans have been leading in polls and many analysts believe the likely result will be a split government, with GOP control of the House of Representatives and possibly the Senate for the second half of Biden's term.

Democrats' electoral hopes have been hammered by voter concerns about high inflation, and Biden's public approval rating has remained below 50% for more than a year, coming in at 40% in a recent Reuters/Ipsos poll.

Disclaimer: Barani Krishnan 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. He does not hold positions in the commodities and securities he writes about.