US Labor Weakness Could Trigger Commodity Recession: Read By Investing.com

Investing.com — Investor sentiment towards commodities has turned more cautious since mid-2024, analysts at Citi Research said in a note on Monday. Commodity prices were relatively stable despite anticipated interest rate cuts by the Federal Reserve in September.

Market volatility decreased, particularly for call options, and many investment firms held short positions in the sector. These factors, combined with the slowdown in the Chinese economy and concerns about a potential US economic recession, have contributed to a more conservative outlook on commodities.

“A softening in China has certainly affected base metals and bulk commodities. But fears of a hard landing in the US also rose in August, despite stronger-than-expected macro data last week (eg retail sales),” analysts at Citi Research said.

“This may exacerbate price volatility and potential gap risk for macro-sensitive subjects (eg {{oil}}, , ) heading into the end of the quarter,” the analysts added.

The US labor market, a key indicator of economic health, plays a crucial role in this scenario. Citi Research suggests that a continued weakening of the labor market could tip the balance toward a recession, which would have significant implications for commodities.

Historical data reviewed by Citi shows that during U.S. recessions, commodity markets typically experience significant volatility, with energy sectors being particularly hard hit. On average, the Bloomberg Commodity Index (BCOMTR) has seen annual losses of about 28% during recessionary periods, with industrial metals and agriculture also posting sharp declines.

“However, in the six months following a US recession, commodities typically post an impressive recovery overall, consistent with a robust recovery in economic activity and investor sentiment,” the analysts said.

Precious metals, known for their resilience, often lead this recovery. For example, in previous post-recession periods, precious metals have averaged gains of 26%, followed closely by industrial metals and energy with gains of 25% and 24%, respectively. This cyclical nature of commodity markets underscores their close ties to economic recovery and reflation.

In terms of asset flows, Citi notes that for the week ending August 13, 2024, there were $4.8 billion in outflows from commodity index and ETF trading, bringing year-to-date inflows to $26.5 billion. dollars. While retail and institutional commodities assets under management (AUM) rose 5.7% year-over-year, they fell 3.7% month-over-month in July to $716 billion.

The market capitalization of the ETP (Exchange Traded Product), dominated by gold tickers, rose 2.4% month-on-month and 8.3% year-on-year to $396.5 billion. Despite current challenges, Citi maintains a cautiously optimistic outlook for commodities over the medium term.

While base metals may struggle in the short term due to weak manufacturing sentiment and US recession fears, Citi expects a rebound as physical markets tighten and a recovery in manufacturing takes hold with cuts expected interest rates.

Copper, for example, is expected to recover to $9,500 per tonne by November and could reach $11,000 per tonne in the next 6-12 months.