Commodities Week Ahead: Oil Up But Market In Knots, Awaiting Fed  

The yanking around of commodities by the dollar and bond yields is expected to continue as the Federal Reserve's rate hike isn't due for another two weeks, while China's renewed vigilance against COVID creates rampant volatility, especially in oil.

Crude prices fell last week, for a fifth time in seven weeks, over what analysts described as concerns that U.S. inflation wasn't receding like the Fed thought, to the extent that consumer sentiment and retail sales were being affected now.

In Monday's Asian session, both New York-traded West Texas Intermediate crude and London's Brent oil were up around 1% each, salvaging some of last week's 7% loss. The rise came as OPEC+ members expressed support for a planned production cut of some 2 million barrels per day from November—despite increased opposition from the United States.

But oil's advance was also measured after China's President Xi Jinping said the country would stick to its zero-COVID policy, despite widespread damage to the Chinese economy this year. Xi said Beijing would ramp up spending and stimulus to help shore up growth. But trailers weren't buying that story entirely.

Stephen Innes, managing director at SPI Asset Management, a Singapore-based energy markets advisory, said:

"The global financial and economic system is becoming increasingly fragile; for investors, there ultimately remains only one natural, safe haven: the U.S. dollar."

The Dollar Index, which pits the dollar against the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc, dipped for only the second time in nine sessions on Monday, hovering at under 113. Despite the retreat, technical charts indicated a high likelihood for the index to reach 120 in the not-too-distant future, promising greater headwinds for oil.

Bond yields benchmarked to the 10-year Treasury note moved below 4% after last week's 14-year high of 4.06%.

The dollar and yields have been chief beneficiaries of the Fed's campaign against inflation as the central bank hiked interest rates by 300 basis points this year and looks set to add another 125 before the year-end.

The latest inflation reading showed a 0.4% growth for the U.S. Consumer Price Index (CPI) last month—double economists' estimates and four times higher than the expansion in August. The annual CPI growth of 8.2% for September was also not too far from the 9.1% expansion seen during the year to June, which marked a four-decade high.

U.S. retail sales were flat in September and below expectations as inflation at near 40-year highs took a toll on consumer appetite, the most dynamic sector of the economy, adding to the Fed's headache in curbing price growth. Retail sales are a major consumer spending indicator, accounting for 70% of the U.S. gross domestic product.

Taken together, the retail sales and CPI numbers suggested the Fed was still far behind in its fight against inflation.

In the wake of last week's hotter-than-expected inflation, U.S. data focus will turn to the housing market with reports due on building permits, housing starts and existing home sales. House prices fell for the first time in over ten years in July as rising interest rates hit housing demand, while mortgage applications have also fallen.

The economic calendar also includes reports on industrial production, the Philly Fed Manufacturing Index, the Empire State Manufacturing Index, and initial jobless claims.

Regional Fed presidents Neel Kashkari, Charles Evans, and James Bullard are also due to make what will be closely watched appearances.

On Saturday, Bullard said last week's CPI figures showed that inflation had become "pernicious" and left the door open to 75 basis point rate hikes at the Fed's upcoming meetings in November and December but added that it was too early to make that call.

OPEC+ members reiterated their support for the supply cut amid a growing rift between the United States and Saudi Arabia, the cartel's leader. The Biden administration criticized the production cut, stating that it would increase oil prices and support Russia's war effort against Ukraine by giving Moscow higher crude revenues.

Washington also accused OPEC leader Saudi Arabia of coercing smaller members into complying with the cut.

Several OPEC+ members denied that the cut had political motivations, arguing that it was instead to stabilize crude prices. News of the cut had sent oil prices soaring earlier this month, with assurances of stability by the cartel supporting a bullish outlook for crude prices.

But the U.S. had also responded to the supply cut by releasing 7.7 million barrels of oil from its Strategic Petroleum Reserve (SPR) last week in order to bring down crude prices.

The United States has steadily drawn from the SPR this year to help cap gasoline prices at home and to lower the amount of oil revenue received by Russia. The Biden administration has now threatened to release more oil in light of the supply cut, which could cause near-term volatility in crude markets.

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.