What’s Next For Commodities As Traders Price In A Pivot To Rate Cuts?

Central Bank Tactics in the Face of Inflation: A Pendulum of Action?

Central bankers stand accused of reacting too slowly to signs that the inflation crisis is dissipating, less than two years after they were criticised for being late in responding to the most brutal surge in prices seen in over four decades.

Some policymakers are already warning that by waiting too long to cut interest rates – central banks could harm weakening economies. The Eurozone has stagnated all year, while the UK is currently experiencing five years of “lost economic growth” as the threat of stagflation looms over the country.

The European Central Bank was thrust into the forefront of this debate this week after Eurozone inflation fell to 2.4%, its lowest level since July 2021. Similar debates are brewing in the U.S and UK, even if headline inflation rates there have not yet fallen as low.

The burning question right now on trader’s mind is which one of the Big 3 Central Banks will be first to cut interest rates?

Traders are ramping up bets that the ECB will be the first major central bank to cut rates next year and will deliver the most aggressive easing cycle.

Elsewhere last week, traders quickly latched onto comments by Federal Reserve Governor Christopher Waller – one of the central banks most influential voices – signalled that interest rates were unlikely to rise further in the U.S and could be cut if inflation continued to slow.

According to Wall Street, conclusive evidence shows inflation has come down more rapidly than the Fed was expecting and that means that policymakers are likely to pencil in more cuts than they were willing to in September.

UBS expects 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.

Meanwhile, Morgan Stanley’s predictions are even bolder. The Wall Street bank anticipates deeper cuts starting in June and then again in September and every meeting from the fourth quarter onward, according to their 2024 outlook report.

The Federal Open Market Committee held its benchmark interest rate steady at a 22-year high in the range of 5.25% to 5.50% at the end of its November policy meeting.

Paving the Path for Commodity Rally Amid Rate Cut Speculation

Traders have already begun pricing in a strong possibility that officials will keep rates on hold again at their upcoming meeting next week – paving a way for the long-awaited “pivot” away from aggressive interest rate hikes to the first rate cut in early 2024.

As traders know – “the bigger the rate cut, the bigger the rally in Commodities”.

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

Commodity Price Forecast

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