A significant downturn in commodity prices could give the Federal Reserve cover to change its aggressive pace of planned interest rate hikes, according to a report from Capital Economics.
The central bank still looks posed to fire off another 75 basis point interest-rate hike later this month, with most Fed officials showing support for the move. The view was fortified by Friday’s strong jobs report, indicating a faster pace of job creation than forecasters had anticipated, but also potentially a bigger challenge for the Fed to dial back inflation.
But elsewhere in markets, growing recession fears were blamed for sending U.S. crude prices CL.1, +0.01% CL00, +0.01% CLQ22, +0.01% below $100 a barrel and entering a bear market. Though U.S. prices settled at $104.79 a barrel on Friday, recession risks still pulled prices down 3.4% for the week.
“The plunge in commodity prices has been particularly notable, with fears over global demand driving oil, agricultural and industrial metals prices sharply lower over the past few weeks,” Andrew Hunter, senior U.S. economist at Capital Economics wrote, in a Friday report. “The drop in energy prices will have the most immediate impact on consumers, with wholesale gasoline prices falling 20% from their mid-June peak and natural-gas prices down by a third.”
Decision-making at the Federal Reserve typically isn’t directly related to oil prices, since the core consumer-price index (CPI), one of the most widely tracked benchmarks for inflation, strips out food and energy costs due to their volatilities. However, lower gasoline prices in the face of Russia’s war in Ukraine may affect what the Fed’s next steps will be, according to Capital Economics.
In other commodities, gold futures GCQ22, -0.08% GC00, -0.08% ended higher on Friday, but posted a fourth consecutive weekly loss, pulled lower by an environment of strong U.S. dollar and rising Treasury yields. Copper futures HGU22, -0.06% for September lost 2.3% for the week at $3.522 per pound.
As MarketWatch wrote earlier, copper is seen as an economic bellwether because the metal is used in many applications and products including construction, household appliances, and electric vehicles. Falling prices may indicate a sour outlook as fears mount over a global economic slowdown.
“We anticipate a 1% m/m gain in prices in June, pushing headline CPI inflation up to 8.7%,” said Hunter. “But that mostly reflects a surge in energy prices, which has since reversed. Together with a slight moderation in core inflation, that would mean another 75bp hike at the July FOMC meeting is not a done deal.”