U.S. stocks opened lower today as investors are beginning to believe that interest rates will remain elevated for an extended period, causing them to reassess their expectations regarding the start of monetary easing. Forward swaps currently indicate approximately a 50% chance of a rate cut in March, pushing U.S. Treasury yields higher, surpassing 4.11%. Concerns about resurging inflationary pressures due to geopolitical uncertainty in the Middle East, combined with a robust economy, suggest that the Federal Reserve may not need to rush into implementing monetary policy easing. Today's release of retail sales data painted a picture of a resilient consumer, with a better-than-expected 0.6% MoM increase, compared to the 0.3% MoM recorded in November. A strong consumer and labour market are likely to influence the Federal Reserve's decision on when to initiate the first interest rate cuts. While at the start of January, we anticipated the first cut to materialize in March, we now believe that interest rates will remain elevated for longer, and the first cuts may not occur until June. Meanwhile, in the UK, the Consumer Price Index (CPI) revealed stronger-than-expected price pressures, with headline annual inflation increasing from 3.9% YoY to 4.0% YoY in December, while core inflation remained unchanged at 5.1% YoY. We anticipate that inflation will continue to fluctuate around these levels, contributing to the narrative of prolonged higher interest rates. While the U.S. dollar continued its ascent today, reaching 103.60, it weakened against the British pound, with the USDGBP pair trading at 0.7903.
The recent strength of the dollar has helped to keep base metals prices suppressed today. Especially aluminium and copper, which are more influenced by macroeconomic factors. The dollar's upside is largely driven by weakening expectations of an early cut from the Fed this year. We expect this narrative to continue into Q2 2024, keeping base metals trading at the lower end of recent ranges. Aluminium breached $2,200/t comfortably today, falling to $2,178/t; the support at $2,110/t remains robust, and we expect this level to hold in the near term. Copper’s downside has been slower in comparison, with prices edging lower to $8,268/t. Zinc sold off today, given a combination of the macroeconomic impact alongside waning supply risks that materialised from Budel smelter suspension earlier this week; the metal closed at $2,466/t.
Expectations of enduring higher interest rates weighed on precious metal prices today, with gold falling to $2,008.19/oz and silver depreciating to $22.58/oz. Oil prices also continued their decline, with WTI and Brent trading at $71.64/bl and $77.24/bl, respectively.
All price data is from 17.01.2024 as of 17:30
