Commodities Week Ahead: Fed-Heavy Week Sets Agenda For Gold; Oil Up On Iran

With the tapering cat out of the bag, all eyes are on what the Federal Reserve will say hereon, leaving gold’s fate pretty much in the hands of speculators who will try to second guess the central bank at every turn.

While Fed Chairman Jerome Powell tried to calm markets last week, by saying any reduction to its monthly asset buying of $120 billion will be telegraphed well in advance to avoid any inordinate market response, calm is the last thing that should be expected.

Traders thrive on outsized market moves and volatility, and one of the ways of achieving this is to twist and turn every word from Powell and his retinue of central bankers in an attempt to discover the so-called underlying truth, or narrative.

For the record, the Fed has made clear it will not be raising interest rates anytime soon. Its expedited timetable for a hike—or actually two—is toward the end of 2023, which leaves us some 2-½ years, or 30 months, to go. 

The Fed also said it is seeking data on the appropriate time to begin scaling back on the $80 billion in Treasuries and $40 billion in mortgage bonds that the central bank has been buying each month since the COVID-19 outbreak to shield credit markets and the economy from the worst impact of the pandemic. 

“Our intention for this process is that it will be orderly, methodical and transparent,” Powell told a news conference after the Fed’s June policy meeting last week, emphasizing that there will be no haste in both rate hike and tapering.

But it’s the job of traders and money managers to be distrusting of the central bank as the Street believes it would be failing in its fiduciary duty by accepting without pushback the testimony of Powell and those who sit on the Fed’s powerful Federal Open Market Committee. 

Mix Of Hawkish, Dovish Talk Clouds Fed Messaging

Adding to this dynamic is the occasional break in the Fed’s messaging, no thanks to the FOMC’s mix of members who are both hawkish and dovish on monetary policy. While Powell has achieved unbelievable cohesion at the FOMC, by getting most of its members to agree with him that the United States is experiencing “transitory inflation” despite some of the strongest price pressures ever, the few hawkish members are enough to form a wall of doubt around the panel.

The question of whether stronger-than-expected inflation would prompt the Fed to act sooner had already been hanging over financial markets in the run up to last week’s June policy meeting. More uncertainty may be on the way before the July meeting and the Fed’s all-important annual conference in Jackson Hole, Wyoming, in late August, where the discussions on the rate hike and tapering will be front and center.

Gold last week endured its worst week since the 2020 COVID outbreak as prices fell almost 6% on the Fed’s revised timetable for tightening, after more than a year of interest rates at between zero and 0.25%. 

Gold Daily

In Monday’s later afternoon trade in Asia, front-month gold futures on New York’s COMEX were at $1,778.40, up $9.40, or 0.5%. Last week, COMEX gold lost $110, or 5.9%, for its biggest drop since the week ended Mar. 6, 2020. The loss came after a seven-week low of $1,768 set for the front-month contract.

For gold, the week begins with Monday’s speeches by St. Louis Fed President James Bullard and New York Fed head John Williams. Bullard’s words, particularly, will be followed with great interest by markets after his observation on Friday that the Fed might have to consider raising rates by the end of next year in order to get ahead of inflation. Bullard becomes a voting member of the FOMC in 2022 and his comments therefore carry weight.

Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly both speak on Tuesday. Other speakers from the central bank during this week include Atlanta Fed President Raphael Bostic and Boston Fed President Boston Fed President Eric Rosengren.

Tim Ghriskey, chief investment strategist at Inverness Counsel in New York, in a comment carried by Reuters said: 

"You will have various Fed governors give speeches, and we'll have the same thing: some governors will be more hawkish, and some will be more dovish, so you'll see some back-and-forth." 

Powell himself delivers congressional testimony on Tuesday, via satellite link, on the Fed’s emergency lending programs and current policies before the House Select Subcommittee on the Coronavirus Crisis.

Major Economic Data On Tap

Friday’s data on personal income and spending will be closely watched as it contains the core Personal Consumption Expenditure Index, which is the Fed’s favored measure of inflation.

The PCE Index jumped 3.1% in April compared to the same month of 2020. The Fed acknowledges the price pressures arising from bottlenecks in US supply chains struggling to cope with demand in an economy reopening after months of pandemic-suppression. But Powell and the dovish Fed officials aligned to him insists that these inflationary pressures are “transient” and will fade as the economy makes a full recovery from the COVID-19. 

Other economic data due this week include reports on new and existing home sales, durable goods orders, manufacturing and service sector activity and the weekly report on initial jobless claims, which is given close attention, given the uneven recovery in the labor market.

Delayed Iran Nuclear Deal Helps Oil

On the oil front, prices rose again after a pause in talks to revive Iran’s nuclear deal, which could delay a resumption in crude exports from the OPEC producer.

Oil Daily

West Texas Intermediate crude, the benchmark for US oil, was at $71.61 by late afternoon in Singapore, up 32 cents or 0.5%. WTI gained 1% last week, after matching an October 2018 high of $72.99 on Wednesday.

Brent crude was at $73.66, climbing 15 cents, or 0.2%. Brent gained 1.1% last week, after matching an April 2019 high of $74.96 on Wednesday.

Oil prices have been on a tear lately amid projections for one of the biggest summer demand periods for fuel in the United States as the country reopens fully from Covid-19 lockdowns.

Despite the optimism over global oil demand, US gasoline demand has been questionable since the May 31 Memorial Day holiday that marked the start of the peak summer driving period in the world’s largest oil consuming country. That suggests to some that more time was probably needed for US fuel demand to accelerate.

There are also concerns about the economy outside the United States and how that could mesh with global oil demand.

In the United Kingdom, some 11,007 new coronavirus infections were reported Thursday amid the spread of the highly transmissible Delta variant of the virus. The US Centers for Disease Control and Prevention said the variant could become the dominant COVID strain in the United States as well despite the country’s massive vaccination drive against the virus.

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 a position in the commodities and securities he writes about.