Commodities across the board got crushed after a very hot inflation report sent the US dollar higher as expectations were boosted for a much more aggressive Fed. Inflation is proving to be much more troubling and that is raising the risk of the Fed sending the US economy into a recession. Energy traders are looking at a tight oil market that is going to have a rough short-term outlook as the consumer is going to be a lot weaker given the robust rate of inflation with core prices.
China’s zero-COVID policy remains intact and that will keep any rebounds that emerge over the coming weeks capped. The US is the big wildcard and if that demand outlook weakens, oil could resume its downward trajectory that has been in place since the start of the summer. A big question mark for oil markets is will the US continue to tap the SPR beyond October. Even with OPEC+ reducing output going forward the energy traders might be less confident the oil market will remain tight much longer.
Gold Under Pressure
Gold got crushed after a scorching inflation report completely reset investor expectations on when the Fed will wrap up their tightening cycle. Wall Street is convinced that the Fed will deliver a 75bp rate hike later in the month and probably will start to price another massive hike in November, which means the downward shift to a half-point hike might have to wait till the December meeting. The playbook for a lot of traders was that the Fed would be done with raising rates in December but that probably won’t be how things play out as inflation remains hot.
Gold is in the danger zone again and could see another run towards the summer lows. We are nowhere near pricing in peak Fed tightening and that means this could be a rough patch for gold. If gold breaks below $1700, not much support is there until the $1650 region.