Macro

Oil, Gold Surge Amid Economic Recovery, May Impact Fed's Rate Plans

Commodities surge amid global recovery, challenging Fed's rate-cut plans with inflationary pressures and geopolitical tensions.

By Athena Xu

4/3, 16:05 EDT
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Key Takeaway

  • Commodities rally, including oil and gold surging, threatens Fed's rate-cut plans amid global economic recovery signs.
  • U.S. Treasury yields rise with the 10-year bond hitting 4.37%, reflecting market skepticism about early Fed rate cuts.
  • Despite a strong dollar, precious metals like gold and silver hit record highs, indicating sustained investor demand for safe-haven assets.

Commodities Rally Challenges Fed

The year 2024 has kicked off with a significant rally in commodities, from oil and gasoline to gold and silver, reaching levels not seen in years. This surge is stoking inflationary fears and complicating the Federal Reserve's path to potentially cutting interest rates by mid-year. The Bloomberg Commodity Index XX:BCOM, tracking 24 major commodities, hit its highest level since November, driven by escalating geopolitical tensions and the ongoing war between Russia and Ukraine. Despite a stronger U.S. dollar, precious metals like silver have seen substantial gains, indicating a robust demand for commodities amidst a global economic recovery.

Global Economic Recovery Fuels Demand

Recent economic data has shown signs of a global economic upswing, with U.S. factory activity growing for the first time since September 2022 and China's industrial recovery adding momentum. This resurgence, particularly China's shift from a disinflationary force to contributing to global inflation, poses a challenge for the Fed's rate cut plans. U.S. Treasury yields have responded by advancing, with the 10-year Treasury bond yield reaching its highest level since November. Oil and energy stocks have surged, with Brent crude futures approaching $90 per barrel, largely due to strong economic growth expectations and geopolitical tensions.

Precious Metals and Energy Stocks Shine

Despite the potential for a stronger dollar, precious metals have maintained their momentum, with gold and silver reaching record and multi-year highs, respectively. This strength is supported by physical demand, central bank purchases, and geopolitical uncertainties. Energy-sector stocks have also outperformed, indicating a structural shift in oil supply and demand dynamics. The S&P 500 energy sector's correlation with oil prices suggests a sustainable upward movement in oil prices, making energy stocks a focal point for investors.

Market Braces for Hawkish Fed

The commodities rally and solid U.S. economic data have renewed concerns about a "hawkish negative surprise" from the Fed, with options traders and strategists at Barclays suggesting the possibility of fewer rate cuts than previously projected. This sentiment has led to a reflation trade, causing a tandem selloff in stocks and government debt while boosting gold, silver, and crude oil prices. Investors are now closely watching for signs of persistent U.S. inflation and the Fed's response, which could introduce more volatility across financial markets.

Street Views

  • Nanette Abuhoff Jacobson, Hartford Funds (Neutral on the global economy and commodities):

    "What’s going on right now is that the market’s sniffing out the possibility that global growth is going to be better than expected with more global inflation and higher commodity prices, which makes it a much more difficult environment for the Fed to deliver three cuts as expected in 2024."

  • Stephen Lee, Logan Capital Management (Bullish on oil demand):

    "Oil is now more demand-related than [related to conflicts in] the Middle East."

  • Nicholas Colas, DataTrek Research (Bullish on energy stocks):

    "The only time to overweight energy [stocks] is when oil prices are moving higher in a sustainable way. The fact that the large-cap energy [sector] is one of the year’s big winners suggests that the market thinks this is happening right now."