Mar 8 / Natália Gandolphi

Coffee Weekly Report - 2024 03 08

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  • This week's macroeconomic events, particularly the release of U.S. non-farm payrolls and unemployment data, impacted commodity prices, notably affecting coffee.

  • Although hiring in the U.S. labor market remained steady, the unemployment rate rose to a 2-year high. Despite positive non-farm payroll results for February, revisions from December and January, along with concerns about inflation, contributed to the trend.

  • The upcoming release of Consumer Price Index (CPI) figures will be crucial, with a 78% probability of a Fed rate cut by June. Coffee prices, especially arabica, experienced a decline due to caution regarding labor market figures, technical markers, and the impact of a weakened Brazilian currency.

  • The tight coffee market, coupled with contrasting origin and destination conditions, leaves it vulnerable to further corrections based on economic trends.

Macroeconomic impacts on coffee prices

This week’s macroeconomic events wreaked havoc over commodity prices, and coffee was one of the main commodities affected. This Friday (08), U.S. non-farm payrolls and unemployment data were released, showing that while hiring remained at a steady pace – suggesting that there is still resilience in the U.S. labor market – the unemployment rate has spiked to a 2-year high. In this report, we will look at the data for the American economy, and its possible impacts on coffee prices.

First, the results themselves. Figure 1 shows the unemployment rate and the non-farm payrolls since 2021. Even though both series are trending lower when compared to 3 years ago, markets agree that the U.S. labor market has been the central piece in the sticky inflation puzzle. Ultimately, while non-farm payrolls for February surpassed expectations (275K vs. the expected 200K), December and January results were revised lower (a combined 167K reduction), and the higher unemployment rate does corroborate the sentiment from the payrolls adjustment.

Still, the story develops next week, with the release of CPI figures on Tuesday (12). It will be the first of the three releases expected until Fed’s June meeting, with a combined probability of 78% of a cut in the Fed’s target rate (vs. the 25.7% combined probability of a cut in May, and a solid bet on unchanged rates for the upcoming meeting on March 20).

Figure 1: U.S. Unemployment Rate and Non-Farm Payrolls

Source: Refinitiv

Figure 2: U.S. Consumer Price Index

Source: Refinitiv

For reference, the month-over-month CPI is expected at 0.4%, already a small increase when compared to the last result (0.3%), and the yearly figure is currently expected at 3.1%, unchanged from the previous result. It’s important to note that the monthly figures are showing more resilience, since in the yearly comparison some components have applied less pressure (such as energy and food items).

Still, alongside a correction from Thursday’s close, results knocked coffee over, especially arabica. The second contract had settled at 192.20 c/lb, the highest since December 2023, but there is also a technical component to it: a medium-term resistance at 192.10 c/lb. With the combined elements of caution regarding U.S. labor market figures and technical markers, coffee prices responded negatively.

Arabica received the brunt of it, but not without reason. Figure 4 shows the daily settlements for the Dollar Index and the USD/BRL exchange rate. The Brazilian currency lost some ground, reflecting internal expectations – namely, public spending discussions impacting this year’s balance, as well as poorer results from Petrobras. Therefore, a higher pressure for arabica when compared to robusta.

Figure 3: LN Robusta and NY Arabica – 2nd Contract

Source: ICE, Refinitiv

Figure 4: Dollar Index and USD/BRL Exchange Rate

Source: Refinitiv

In Summary

This week has been all about macroeconomic results, with some spillover in commodities markets, especially coffee. Fundamentally, as highlighted in past reports, the market remains tight in destinations, while origins are either fresh with new 23/24 supplies, counting on ample stocks from the previous cycle, or a combination of both – creating a contrast that leaves the market vulnerable to the same trend of corrections as seen this week.

U.S. inflation data will be watched closely by the market, since it will dictate the probability of rate cuts in the next Fed meetings. It’s also important to note that while this week’s results were slightly bearish for coffee prices, the definition of further pressure over prices will depend on how much these labor results will translate into inflationary pressures.

Weekly Report — Coffee

Written by Natália Gandolphi
Reviewed by Victor Arduin


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