Interest Rate Cuts Are Coming. What Does That Mean For Commodity Prices?

Phil Carr
Published: Nov 20, 2023, 17:55 UTC

A growing chorus of the world’s most powerful Wall Street banks have described the current economic climate as “The Golden Age of Trading”.

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Wall Street’s Call to Diversify into Commodities as Inflation Figures Redefine Market Expectations

According to their 2024 outlook reports – a long list of Wall Street banks have raised their price forecasts for the year ahead and are advising their clients to shift away from Stocks and Bonds and diversify into Commodities for 2024.

JP Morgan, Citigroup and Goldman Sachs believe the risk-to-reward in Equities and Bonds is now heavily skewed to the downside. While on the flipside, Commodities look much more appealing and present the most attractive risk-to-reward heading into the end of the year and 2024.

Last week, a normal week for markets became something extraordinary after the closely watched Consumer Price and Producer Price Inflation figures gave traders a greenlight to declare that the Federal Reserve’s fight against inflation was finally over.

U.S Producer Price Inflation cooled off in October, reversing a three-month trend that had seen the cost of energy push up prices. The Producer Price Index, fell 0.5% on a monthly basis – its largest monthly drop since April 2020.

Meanwhile, a day earlier, U.S Consumer Price Inflation also fell more than expected to 3.2% in October – the first decline in four months.

The Fed held its benchmark interest rate steady at a 22-year high this month. Traders had put the likelihood of another rate hike at 30% just before the PPI and CPI releases, but by Wednesday that had been priced out altogether. Instead, they moved to ratchet up the likelihood of a cut, with the prospect of a cut by March soaring from 23% on Monday to 86% by Wednesday’s close.

Anticipating Record Highs in Commodity Prices Amidst Shifting Rate Cut Expectations

Right now, we are seeing the market narrative rapidly shift away from “higher-for-longer interest rates” to “bigger-than-expected rate cuts in 2024”.

As traders know – “the bigger the rate cut, the more bullish it will be for Commodity prices”.

If history is anything to go by, then this new shift in narrative almost certainty sets the stage for Commodity prices to hit new record highs in the coming weeks and months ahead.

According to UBS, the Fed will start cutting rates as soon as March, on the expectation that the U.S economy will slide into recession by the second quarter. This in turn will prompt the central bank to cut rates by 275 basis points next year, with the terminal rate plunging to 1.25% by early 2025.

The big question now is when will the Fed start cutting interest rates?

The answer to that question may come from the hotly awaited release of the Federal Reserve’s Monetary-Policy Meeting Minutes, due for release on Tuesday – which always has the potential to move the markets significantly.

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About the Author

Phil Carrcontributor

Phil Carr is co-founder and the Head of Trading at The Gold & Silver Club, an international Commodities Trading, Research and Data-Intelligence firm.

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