After expectations for an interest rate cut in the US were frustrated in the first half of 2024, the FOMC (Federal Open Market Committee) delivered the long-awaited beginning of the loosening of American monetary policy. Moreover, it implemented an aggressive 50-basis-point cut, surprising part of the market that had expected monetary authorities to be more conservative in their decision.
Since most commodities are traded in dollars, the weakening of the U.S. dollar makes these raw materials cheaper for holders of other currencies, resulting in increased demand in the market. Some commodities were already experiencing an upward trend due to supply-related factors, such as coffee, which has seen a deficit greater than expected in the 2024/25 harvest.
Now, new bullish fundamentals are developing for other commodities, such as grains, which could benefit from a more favorable growth environment in emerging economies. The monetary easing in the U.S. has created room for Asian central banks to cut interest rates, which, coupled with the appreciation of their currencies, could result in increased demand for agricultural commodities in 2025.
Recently, China announced a new stimulus package to strengthen its economy, which is perilously close to deflation and could face difficulties in achieving its growth target of 5%. Although some sectors of the country, such as exports and industrial production, are performing well, the Chinese real estate sector continues to decelerate and poses significant risks to the commodities market, especially for energy products like crude oil.
While in the East, the most significant risk vector for the commodities market comes from China, in the West, signals from the U.S. labor market are also concerning. The effects of American interest rates are still rippling through the economy, which could raise the unemployment rate in the country to nearly 5%. Although the likelihood is low, the risk of a recession cannot be completely dismissed. Additionally, the growth of part-time employment and the decline of full-time positions raise red flags.
In this context, we may gradually observe improvements in the commodities market amid strengthening demand fundamentals from Asia, while macroeconomic data from the U.S. could lead to corrections in the coming months.
US monetary policy has a broad impact on the commodities market, as it directly influences the value of the dollar and indirectly affects the demand for commodities.
In this context, Asian economies are benefiting from the downward outlook for the US dollar, resulting in greater purchasing power and room for interest rate reductions in their economies, which could particularly benefit agricultural commodities.
In the energy complex, risk premiums are emerging in the Middle East as the conflict between Hamas and Israel unfolds. This could result in short-term support for oil prices.
However, there are important risks to monitor in the market, such as the structural issues in the Chinese economy that could frustrate growth expectations and, consequently, consumption of commodities, as well as signals from the U.S. labor market.
