Commodities Week Ahead: Taut Nerves in Oil, Gold Markets Ahead of CPI

• Softer US jobs report for June is only one-half of the inflation puzzle, risk-driver
• Traders anxiously look out for Wednesday’s CPI report to get a read on Fed
• Oil, gold fumble at start of week in Asia but could turn higher as day progresses

The softer US jobs report for June is only one facet of the risk driver that oil and gold need this week. To complete the picture, Wednesday’s Consumer Price Index, or CPI, report for last month will have to be just as soft to dial down the Federal Reserve’s hawkishness, ensuring the central bank doesn’t go beyond two more rate hikes this year — better still, one.

As a new week began for July, prices of crude and the yellow metal both slid in Asian trade as longs grew anxious about what the CPI report for June could show.

In Monday’s trade, the front-month August gold contract on New York’s Comex was down $3.75, or 0.2%, to 1,928.75 by 02:30 ET (06:30 GMT) after finishing last week little changed.

Weighing on oil was weak economic data out of top importer China. Factory-gate prices in China fell at the fastest pace in seven-and-a-half years in June, data showed, while consumer inflation was at its slowest since 2021, adding to the case for policymakers to use more stimulus to revive sluggish demand.

London-based Brent crude was down 57 cents, or 0.7%, to $77.90 by 02:30 ET (06:30 GMT). Brent hit a one-month high of ​​$78.53 last week to finish with a 4.8% gain after the prior week’s 1.4% rise.

New York-based West Texas Intermediate, or WTI, crude was down 53 cents, or 0.7%, to $73.33. WTI hit a one-month high of nearly $74 on Friday before closing the week up 4.6%, extending the previous week’s 2.1% gain.

Consolidation could limit WTI this week to the 50-day EMA, or Exponential Moving Average, of $71.70, which — if broken — might see bears regain control in pushing for a correction back towards $70.30, or even $68, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

The greater likelihood, though, was momentum accumulation from support areas that would “very likely resume the uptrend,” Dixit said, adding:

“The target is to retest the swing high of $73.90, followed by a strong breakout above resistance for the next leg higher, which is the 200-day SMA of $77.30 followed by the 50-week EMA of $78.60.”

Monday’s drop in crude prices was limited by oil bulls’ falling back on some of last week’s supportive fundamentals, including substantive across-the-board draws in crude and fuels and further production cut pledges by Saudi Arabia and Russia.

US oil inventory data released on Thursday showed crude stockpiles falling for a third week in a row while inventories of gasoline and distillates shrank too.

Saudi Arabia will extend its 1 million barrels per day (bpd) output cut into August, and Russia will cut crude exports by 500,000 bpd. Instead of cutting output, Russia will use the crude to produce more fuel to meet domestic demand. A government source told Reuters on Friday.

Saudi Arabia's cuts are easing its oil glut as floating storage off the Egyptian Red Sea port of Ain Sukhna is down by almost half to 10.5 million barrels from mid-June, according to data from oil analytics firm Vortexa as of July 7.

If Wall Street’s economists are right, the CPI could register a growth as small as 3.1% in June versus May’s 4%.

The May growth in the CPI and the 3.8% expansion in the Fed’s favorite price indicator, the Personal Consumption Expenditures index, had pared risk appetite last month despite the central bank skipping a rate hike in June. The fear was that both price indicators were still at or almost double the Fed’s long-term inflation target of 2%, and questions abound on what the central bank could do in such a stubborn inflationary environment.

The June jobs report, however, brought unprecedented relief to traders long on risk assets, giving them hope that the Fed was gaining steady ground in curbing inflation, even if the central bank was taking longer than it should. According to the Labor Department, US employers added only 209,000 nonfarm payroll jobs last month, some 100,000 below the estimates. It was the first time in 16 months that the number wasn’t higher than what was projected by the economists.

Still, there was no certainty that the jobs report alone could change the macro picture for oil. This was because, despite the slump in payrolls, wages of Americans expanded by 0.4% in June from a 0.3% growth in May, even as the unemployment rate dropped 3.6% from a previous 3.7%. The Fed has insisted that job numbers and wages have to drop appreciably to discontinue rate hikes in the longer term.

To be sure, Chicago Fed chief Austan Goolsbee made no bones on what he thought about the jobs report, telling CNBC soon after it was out:

“Never make too much out of any one month of jobs numbers. I still want to see the inflation data. I haven't seen anything that says one or two more rate hikes this year is wrong. We can have one to two more rate hikes this year.”

To follow up with Golsbee’s remarks from Friday, a roster of Fed speakers are on this week to share their thoughts on inflation. Minneapolis Fed President Neel Kashkari, Cleveland Fed President Loretta Mester, San Francisco Fed President Mary Daly, and Fed Governor Christopher Waller are among those scheduled to speak this week.

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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.